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  • Impact of Financial Distress

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    Financial distress occurs when a company cannot meet its debt obligations and risks insolvency if liquidated, increasing expected costs. While debt provides tax advantages, it also raises the risk of financial distress from business failures preventing debt repayment. A company must balance the tax benefits of debt against the costs of financial distress and potential insolvency if the going concern is impaired and debt cannot be paid.

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    Financial distress occurs when a company cannot meet its debt obligations and risks insolvency if liquidated, increasing expected costs. While debt provides tax advantages, it also raises the risk of financial distress from business failures preventing debt repayment. A company must balance the tax benefits of debt against the costs of financial distress and potential insolvency if the going concern is impaired and debt cannot be paid.

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    10 views1 page

    Impact of Financial Distress

    Uploaded by

    jorgoca2
    Financial distress occurs when a company cannot meet its debt obligations and risks insolvency if liquidated, increasing expected costs. While debt provides tax advantages, it also raises the risk of financial distress from business failures preventing debt repayment. A company must balance the tax benefits of debt against the costs of financial distress and potential insolvency if the going concern is impaired and debt cannot be paid.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Impact of Financial Distress:

    Financial distress arises when the company is not able to meet its debt obligation.

    Company’s Taxes:

    There is a trade off between tax advantages of debt and cost of financial distress. Financial
    distress occurs because of the business risk, because if the company is not able to pay its
    debt obligation, then it is a big risk for the company, however there are tax savings by
    introducing debt holders that are secured and have right to liquidate in case of insolvency.

    Expected Costs:

    Expected costs usually increase because of financial distress.Usually financial distress in a


    company leads towards the rise of many costs.If the company’s going concern assumption
    is impaired, then the company will go towards insolvency given if there is liquidation.

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