© 2000 John Petroff

4)- Need for reduction of default potential

Obviously, management must take the necessary steps to avoid a possible default. Careful planning, thorough understanding of the market and proper timing of actions are some of the first steps. Building security in free cash, in reserves and with insurance policies are also useful. One important avenue to reduce risk is not to take on fixed and unchangeable obligations. Next chapter will be devote to an analysis of alternatives in financing expansion, and a range of contractual debt arrangements will be identified as serving different circumstances. For instance, if the marketing and production strategies dictate an assumption of greater financial leverage and operating leverage at the same time, then the alternative of hybrid financing, between debt and equity, would deserve serious consideration. Preferred stock is such a hybrid.

See review questions Q-11D4.1 and Q-11D4.2.

See research assignment R-11D4.1

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