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Does the risk of bankruptcy represent a disadvantage to using debt? Research and discuss a bankruptcy case of a firm that can overcome its difficult situation.

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Does the risk of bankruptcy represent a disadvantage to using debt?

Yes, the risk of bankruptcy represents a serious disadvantage to using a debt. In case of equity financing the risk of bankruptcy is not there. Further, the risk of bankruptcy arising from not being able to make interest and principal payments represents the financial risk of debt financing. If a firm is not able to make interest payment or is not able to repay the principal amount in time, the ...

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FInance: Treasury bonds, investment risk, bankruptcy, small business, credit markets

1. The US funds it deficit spending through the sale of government debt such as Treasury Bonds. China has now become the largest creditor of the United States as it now holds a little less than $1 Trillion of US Government Debt. What are the risks and rewards to purchasing foreign securities? And if there are indeed big rewards, why is this type of investment not more prevalent within our own country and with our own domestic investors?

http://www.ustreas.gov/tic/mfh.txt

2. There are two main categories of risks as far as investments are concerned: systematic and nonsystematic. Please provide an example of each type of risk and a way to mitigate both.

3. GM recently faced a restructure plan through bankruptcy court (Chapter 11). In addition to cutting costs by closing plants etc, the company swapped more than $27 billion in bond debt for GM stock. The US government now owns approximately 60%+ of GM by some reports. Is converting debt to equity a viable means of securing working capital and generating cash flow? Are there disadvantages to this type of swap? Do you feel this is necessarily the best plan or are there other alternatives for securing cash and working capital in the short term?

http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/

4. According to the Small Business Administration, small businesses account for more than 99% of all firms and over 65% of all new jobs over the last decade. Yet only a miniscule portion of the stimulus package is dedicated to providing relief for the smaller business with the main focus being tax breaks. Will this be enough to aid the smaller business? What are the issues small businesses face in this economy and what, if anything, should the government be doing to help them?

http://web.sba.gov/faqs/faqindex.cfm?areaID=24

5. The credit market within the US is at a standstill. While the government has infused funding to banks, credit is still not flowing. How has this situation affected businesses within the US? Besides cutting costs, what should a business in this economy be doing to mitigate the effects of the credit crunch on its financial sustainability?

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