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Chapter 5: Q1DQ (page 538)

What is the difference between technical insolvency and bankruptcy?

Short Answer

Expert verified

Technical insolvency is the case of the inability of the organisation to meet its obligations, and bankruptcy is the scenario where the organisation has a negative net worth.

Step by step solution

01

Step 1:Meaning of technical insolvency

The circumstances when an organisation is unable to pay its bills and other obligations on the due date is called technical insolvency.The organisation may be insolvent even if they are generating positive cash flows.

02

Meaning of bankruptcy

The scenario in which the company’s assets have a lower market value than its liabilities is considered bankruptcy.The bankruptcy results in a negative net worth for the organization.

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Most popular questions from this chapter

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

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