Financial Distress & Air Line Industry
UNIVERSITY OF MYSORE
DEPARTMENT OF STUDIES IN BUSINESS ADMINISTRATION
B. N. BAHADUR INSTITUTE OF MANAGEMENT SCIENCES
MANASAGANGOTRI MYSORE 570006
KARNATAKA, INDIA
Seminar Paper on
Financial Distress and Restructuring
A Case Study of
Air India Ltd & Kingfisher Airlines Ltd
Submitted to
Dr. B. Shivraj
Professor, DOSBA, UoM
Submitted by
Mr. Prasad V. Daddikar
MBA IV Semester, Roll No. 50
Reg. No. 10MBO102
INTRODUCTION
Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy. Financial distress is usually associated with some costs to the company; these are known as costs of financial distress.
A common example of a cost of financial distress is bankruptcy costs. These direct costs include auditors' fees, legal fees, management fees and other payments. Cost of financial distress can occur even if bankruptcy is avoided (indirect costs): Financial distress in companies can lead to problems that can reduce the efficiency of management. As maximizing firm value and maximizing shareholder value cease to be equivalent managers who are responsible to shareholders might try to transfer value from creditors to shareholders.
The result is a conflict of interest between bondholders (creditors) and shareholders. As a firm's liquidation value slips below its debt, it is the shareholder's interest for the company to invest in risky projects which increase the probability of the firm's value to rise over debt. Risky projects are not in the interest of creditors, since they also increase the probability of the firm’s value to decrease further, leaving them with even less. Since these projects do not necessarily have a positive net present value, costs may arise from lost profits.
CAUSES AND EFFECTS OF FINANCIAL DISTRESS
• Macro-Level Factors
✓ Liquidity,
DEPARTMENT OF STUDIES IN BUSINESS ADMINISTRATION
B. N. BAHADUR INSTITUTE OF MANAGEMENT SCIENCES
MANASAGANGOTRI MYSORE 570006
KARNATAKA, INDIA
Seminar Paper on
Financial Distress and Restructuring
A Case Study of
Air India Ltd & Kingfisher Airlines Ltd
Submitted to
Dr. B. Shivraj
Professor, DOSBA, UoM
Submitted by
Mr. Prasad V. Daddikar
MBA IV Semester, Roll No. 50
Reg. No. 10MBO102
INTRODUCTION
Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy. Financial distress is usually associated with some costs to the company; these are known as costs of financial distress.
A common example of a cost of financial distress is bankruptcy costs. These direct costs include auditors' fees, legal fees, management fees and other payments. Cost of financial distress can occur even if bankruptcy is avoided (indirect costs): Financial distress in companies can lead to problems that can reduce the efficiency of management. As maximizing firm value and maximizing shareholder value cease to be equivalent managers who are responsible to shareholders might try to transfer value from creditors to shareholders.
The result is a conflict of interest between bondholders (creditors) and shareholders. As a firm's liquidation value slips below its debt, it is the shareholder's interest for the company to invest in risky projects which increase the probability of the firm's value to rise over debt. Risky projects are not in the interest of creditors, since they also increase the probability of the firm’s value to decrease further, leaving them with even less. Since these projects do not necessarily have a positive net present value, costs may arise from lost profits.
CAUSES AND EFFECTS OF FINANCIAL DISTRESS
• Macro-Level Factors
✓ Liquidity,