Question Tag: Bankruptcy

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  • 6 Marks

BL – May 2015 – L1 – SB – Q1c – Company Law

Explain the term "Insolvency" and state four consequences of insolvency.

An insolvent person cannot properly manage his personal affairs.
i. Explain briefly the term “Insolvency”. (2 Marks)
ii. State FOUR consequences of Insolvency. (4 Marks)

i. Insolvency refers to the state where an individual or entity is unable to meet financial obligations as they become due, with liabilities exceeding assets. (2 Marks)

ii. FOUR consequences of Insolvency:

  1. Exposure to bankruptcy petitions filed by creditors.
  2. The insolvent person can be sued by creditors for debt recovery.
  3. Assets may be transferred to a trustee in bankruptcy.
  4. The individual may face harassment and embarrassment from creditors. (4 Marks)
  • 8 Marks

BMIS – Nov 2016 – L1 – Q4a – Business and organisational structure

State reasons that may influence a company or government to undertake a divestiture program.

State FOUR reasons that may influence a company or government to undertake a divestiture programme.

(8 marks)

  • Raise funds: Divestiture programmes are undertaken to raise funds for the company or the government.
  • Focus on core activities: They enable the company to concentrate on its core activities.
  • Bankruptcy process: Divestiture may be part of a company’s bankruptcy process.
  • Lack of synergy: Companies undertake divestiture if there is no synergy between the divested assets and the company’s core activities.

(Any 4 x 2 marks = 8 marks)

  • 10 Marks

BMIS – May 2016 – L1 – Q5a – Finance, R&D and marketing strategies

Identify five reasons that might cause a company to reduce its prices.

A manufacturing company has decided to reduce its prices. Identify FIVE reasons that might have caused the company to take this decision.

i) Competitive Reasons: The firm may decide to reduce its prices as a response to price reduction by competitors.

ii) Excess Production: When a company produces in excess of demand, there is the likelihood that prices of the products will be reduced in order to clear the excess products.

iii) Falling Brand Share: A company may also reduce prices if the brand power is declining. It must reduce the price to be able to exit the market.

iv) Bankruptcy: If a company is nearing bankruptcy, it may be forced to slash its prices in order to increase sales and increase revenue, which will facilitate its liquidity status in order to avoid the bankruptcy.

v) Low Quality: When the perceived quality of the company’s product reduces as a result of the introduction of a more superior product, it may be forced to reduce its prices.

vi) Seasonal Strategy: A company may decide to reduce its prices during certain seasons like Christmas to increase its sales volume and revenue and at the same time reward customers.

vii) Technological Changes: When a competing firm introduces a more technologically advanced product than what the manufacturing company is offering currently, it will have to reduce its prices to sell the obsolete products.

viii) Economic Recession: When the economy in which the company is operating declines in terms of disposable income and purchasing power, the company will have to reduce its price to encourage consumers to buy.

ix) Drop in Raw Material Prices: When the cost of raw materials used to produce the company’s products reduces, the company may also decide to reduce its prices to retain its customers.

  • 6 Marks

FM – May 2021 – L2 – Q3a – Capital Structure

Discuss the main difficulties associated with highly geared companies.

a) Shareholders and Management of companies generally agree that it is good to introduce gearing into a company’s financing structure to enhance returns to shareholders. Excessive debt and gearing above a level that a company can comfortably afford is risky.

Required:

State and explain THREE (3) main difficulties associated with highly geared companies. (6 marks)

High gearing introduces several risks or problems to companies, and these include:

  1. High volatility to company or equity returns:
    • The higher the level of debt, the higher the company’s level of interest cost or expense. Volatility in interest rates, especially variable interest rate debts, can cause volatility in the company’s earnings. Drops in earnings resulting from a rising interest rate environment, and vice versa, expose the company and shareholder returns to a high level of volatility and uncertainty.
  2. High debt burden and bankruptcy risk:
    • An over-borrowing environment can lead to significant interest payments that may overwhelm the company’s earnings. If the earnings are insufficient to cover these costs, it can push the company into financial distress, increasing the risk of bankruptcy. In such scenarios, shareholders may lose the value of their investments since they are the last to be compensated in a liquidation.
  3. Loss of market reputation and credibility:
    • High levels of debt are easily noticeable in financial disclosures, which can lead to a loss of confidence among shareholders and analysts. This can trigger a crisis of confidence and negatively impact the company’s market reputation and credibility.
  4. Short-termism in management decisions:
    • Excessive gearing may pressure management to focus on short-term financial goals, such as generating cash flow to service debt, rather than on long-term strategies that enhance shareholder value. This short-term focus can compromise the company’s long-term growth and sustainability.
  5. Lower financial flexibility:
    • High levels of debt limit the company’s ability to take on additional financing when needed, reducing its financial flexibility. This can restrict the company’s ability to invest in new opportunities, respond to market changes, or navigate financial downturns effectively.

(Any three points @ 2 marks each = 6 marks)

 

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