Is Spandex Corporation worth it more dead or alive? That was the question the President of Falkner Investment Inc., Robert Falkner was troubled making a decision on. Spandex had been facing negative earning and poor liquidity conditions which resulted in severe financial distress for the past three years. Robert invested in the company about nine years ago, at the time the industry outlook was good. Spandex has requested its creditors to be given a chance to reorganize and restructure. The company also vowed to put in their best effort to steer the company back on the road to profitability. However, if the firm was forced to liquidate, there’s a possibility the current assets could be sold for 40% of the book value, also the fixed assets might be able to bring in about $9 million. Nevertheless 20% of the gross proceeds would be paid towards administrative fees and other charges. Confused and indecisive, Falkner turned to his CFO for help, hoping he could shed some light after reviewing the financial statements of Spandex. Financial distress is a situation where a company cannot meet its financial duty to its creditors. There are various ways, which a firm can find itself in financially distressed position. Having high fixed costs, illiquid assets, and/or revenues that are sensitive to poor economic conditions are all ways a firm can find itself in financially distressed position. Spandex Corporation’s main problems, which are resulting their firm to become financially distressed, are due to significantly lower profit margins and declining demand due to competition and weak economic conditions. During the past three years Spandex Corporation has faced negative earnings and poor liquidity conditions. Absolute priority rule also known as "liquidation preference." is a rule that specifies the order of payment in which creditors are paid before shareholders in the event of liquidation. In a case of bankruptcies it is usually decided which participants will receive what portion of payment. Debts to creditors will be paid first and shareholders divide what remains. If Spandex Corporation