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imported>Doug Williamson |
imported>Doug Williamson |
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| ''Corporate finance''. | | ''Bank resolution.'' |
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| According to Modigliani and Miller's theory, as a company’s capital structure is composed of more and more debt a point is reached where equity cost and debt cost increase beyond that predicted by pure arbitrage of the appropriate cost of capital for the business.
| | Key Attribute. |
| This extra cost is described as the cost of financial distress; potentially the cost of dealing with a near-insolvency situation.
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| Financial distress costs can include:
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| * Higher rates of interest payable on borrowings.
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| * Additional fees payable on new borrowings.
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| * Additional restrictive covenants for new borrowings.
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| * Reduced availability of borrowings.
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| * Reduced availability of trade credit.
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| * Management time and loss of operational focus through the additional communications needed with lenders.
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| * In the worst case, actual insolvency.
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| The point at which financial distress costs become significant can be difficult to predict with precision.
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| However it can be estimated by reference to industry norms for key financial credit assessment ratios such as interest cover and debt equity ratios.
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| At the point at which the borrower breaches the industry norm for key ratios, it is likely that significant financial distress costs will be incurred.
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| Also known as Bankruptcy costs.
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| == See also == | | == See also == |
| * [[Debt equity ratio]] | | * [[Key Attributes]] |
| * [[Insolvency]]
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| * [[Interest cover]]
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| * [[Modigliani and Miller]]
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Revision as of 07:30, 5 April 2016
Bank resolution.
Key Attribute.
See also