Westland Industries was suffering from cash flow insolvency in terms of its earnings before interest, taxes, and depreciation (EBITDA).
Two scenarios are possible for Westland in Year 3:
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Scenario 1 suggests that the results from operations for Year 2 are expected to be repeated in Year 3 and thereafter.
In scenario 2, Westland is expected to have a breakout year in terms of sales of $400,000 and operating expenses before depreciation of 60 percent of sales. Interest is expected to remain at $40,000 because of the need to finance the venture’s growth.
Instructions: a. Prepare basic income statements (from sales to EBIT) under both scenarios. Comment on your findings. (10 points)
b. Many people believe that when a firm goes into financial distress, it is finished. Is this true? Explain what options are available in resolving financial distress situations. (5 points)
c. There are various methods of restructuring that firms can follow in the process of turning around a venture in financial distress. Which do you think are most effective? Explain why.