Suppose company CW is in default, but if the firm continues for one period, it will be worth 60 (scenario 1) or 20 (scenario 2), with equal probabilities. The senior creditors Cs are owed 50 and the junior creditors C j are owed 50. It can be liquidated immediately for 45. You can assume for this question that the interest rate is zero.

(a) Is firm CW in economic distress? Explain why or why not.

(b) Explain how, in a bankruptcy regime with structured bargaining, the firm might be inefficiently allowed to continue operating.

(c) In April 2020, in the U.S., 560 companies filed for a Chapter 11 bankruptcy. Including the Chapter 7 liquidation process, there were 2,278 corporate filings in April, down 35% from last year and surprisingly low for a recession. Also in May 2020, the total number of U.S. bankruptcy filings was down 42% from a year earlier. Provide an economic explanation of these numbers and discuss briefly the potential issues with the Chapter 11 process during the Covid-19 crisis.

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