Kimberly MacKenzie — president of Kim ’ s Clothes Inc., a medium-sized manufacturer of women ’ s…

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in  collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago.Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that
indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’s management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.Kim’s immediate concern was whether her firm would collect its receivables if Russ
Brothers went bankrupt. In pondering the situation, Kim also realized that she knew nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions.
a. (1) What are the major causes of business failure?
(2) Do business failures occur evenly over time?
(3) Which size of firm, large or small, is more prone to business failure? Why?
b. What key issues must managers face in the financial distress process?
c. What informal remedies are available to firms in financial distress? In answering this
question, define the following terms:
(1) Workout
(2) Restructuring
(3) Extension

(4) Composition
(5) Assignment
(6) Assignee (trustee)

d. Briefly describe U.S. bankruptcy law, including the following terms:
(1) Chapter 11
(2) Chapter 7
(3) Trustee

(4) Voluntary bankruptcy

(5) Involuntary bankruptcy

e. What are the major differences between an informal reorganization an reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(1) Common pool problem
(2) Holdout problem
(3) Automatic stay
(4) Cramdown

(5) Fraudulent conveyance

f. What is a prepackaged bankruptcy? Why have prepackaged bankruptcies become more popular in recent years?
g. Briefly describe the priority of claims in a Chapter 7 liquidation.
h. Assume that Russ Brothers did indeed fail, and that it had the following balance sheet when it was liquidated (in millions of dollars):

Kimberly MacKenzie — president of Kim ’ s Clothes Inc., a medium-sized manufacturer of women ’ s...-1Kimberly MacKenzie — president of Kim ’ s Clothes Inc., a medium-sized manufacturer of women ’ s...-2

Kimberly MacKenzie — president of Kim ’ s Clothes Inc., a medium-sized manufacturer of women ’ s...-3

For simplicity, assume there were no trustee’s fees or any other claims against the liquidation proceeds. Also, assume that the mortgage bonds are secured by the entire amount of fixed assets. What would each claimant receive from the liquidation distribution?

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