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1、CHAPTER16CapitalStructureLimitstotheUseofDebtAirlineshavetraditionallyreliedheavilyontheuseof$1.2billioninthefourthquarter,andenteredbankruptcy?nancialleverage.Unfortunately,thispracticecanhaveinSeptember2005.NorthwestAirlines,alsofacinghugeadverseconsequenceswhenthingsdon’tworkoutasloss
2、es,?ledatthesametimeasDelta.Inbothcases,itplanned,astheairlineindustryhasplainly(andpainfully)islikelytobesometimebeforethecompaniesemergeshowed.Forexample,onFebruary1,2006,UnitedAirlinesfromthebankruptcyprocess.Inearly2006,another?veemergedfromChapter11bankruptcyafterspendingsmallerairl
3、ineswerealsoinbankruptcy.38monthsinthebankruptcyprocess.EventhoughtheAsthesesituationspointout,thereisalimittothecompanyreorganizeditsbalancesheet,itstillfacedprob-?nancialleverageacompanycanundertake,andthelems.During2005,Unitedpostedalossof$741million,riskoftoomuchleverageisbankruptcy.
4、Inthischapter,anditslossinthefourthquarteroftheyearwasits22ndwediscussthecostsassociatedwithbankruptciesandconsecutivequarterwithredink.howcompaniesattempttoavoidthisprocess.Ofcourse,otherbigairlineswerestillinbankruptcy.DeltaAirLineslost$3.8billionin2005,including16.1CostsofFinancialDis
5、tressBankruptcyRiskorBankruptcyCost?Asmentionedthroughoutthepreviouschapter,debtprovidestaxbene?tstothe?rm.How-ever,debtputspressureonthe?rmbecauseinterestandprincipalpaymentsareobliga-tions.Iftheseobligationsarenotmet,the?rmmayrisksomesortof?nancialdistress.Theultimatedistressisbankrupt
6、cy,whereownershipofthe?rm’sassetsislegallytransferredfromthestockholderstothebondholders.Thesedebtobligationsarefundamentallydif-ferentfromstockobligations.Althoughstockholderslikeandexpectdividends,theyarenotlegallyentitledtodividendsinthewaybondholdersarelegallyentitledtointerestandpri
7、ncipalpayments.Weshownextthatbankruptcycosts,ormoregenerally?nancialdistresscosts,tendtooffsettheadvantagestodebt.Webeginbypositingasimpleexampleofbankruptcy.Alltaxesareignoredtofocusonlyonthecostsofdebt.455ros05902_ch16.indd4559/25/0611:20:27AM456PartIVCapitalStructurean
