Capital Structure Limits to the Use of Debt推荐.pdfVIP

C H A P T E R 16 Capital Structure Limits to the Use of Debt Airlines have traditionally relied heavily on the use of $1.2 billion in the fourth quarter, and entered bankruptcy financial leverage. Unfortunately, this practice can have in September 2005. Northwest Airlines, also facing huge adverse consequences when things don’t work out as losses, filed at the same time as Delta. In both cases, it planned, as the airline industry has plainly (and painfully) is likely to be some time before the companies emerge showed. For example, on February 1, 2006, United Airlines from the bankruptcy process. In early 2006, another five emerged from Chapter 11 bankruptcy after spending smaller airlines were also in bankruptcy. 38 months in the bankruptcy process. Even though the As these situations point out, there is a limit to the company reorganized its balance sheet, it still faced prob- financial leverage a company can undertake, and the lems. During 2005, United posted a loss of $741 million, risk of too much leverage is bankruptcy. In this chapter, and its loss in the fourth quarter of the year was its 22nd we discuss the costs associated with bankruptcies and consecutive quarter with red ink. how companies attempt to avoid this process. Of course, other big airlines were still in bankruptcy. Delta Air Lines lost $3.8 billion in 2005, including 16.1 Costs of Financial Distress Bankruptcy Risk or Bankruptcy Cost? As mentioned throughout the previous chapter, debt provides tax benefits to the