1. What is Coleco’s financial condition, and how did it come about?

2. At this point, who are the significant players in any potential outcome? What are their motivations? 

3. What are management’s alternative courses of action? How does each one work?

4. What should Meyer do? How should he persuade his colleagues and board of directors of the effectiveness of this course of action?

In March 1988, this large toy manufacturer is facing the consequences of bearing too much debt in a volatile competitive environment. The student’s task is to recommend a response to the worsening situation by which the firm can be returned to financial health. At the date of the case, the company is not under judicial protection, although bankruptcy looms as a distinct possibility if negotiations with lenders produce no mutually agreeable solution.

The case was developed to stimulate a discussion of the determinants of corporate-debt policy as part of a pair of cases set in the toy industry (the other being “Tonka Corporation,” UVA-F-0774). In sharp contrast to the Tonka case, this case raises the costs of financial distress as a constraint on the use of debt. The case discussion can also sharpen students’ thinking on the exact nature of financial distress and how it differs from the special case of bankruptcy. Moreover, the case can be used to illustrate the allocative issues that arise in working out a satisfactory financial plan for recovery. Finally, the case provides an opportunity to compare the equity in a distressed firm with an out‑of‑the‑money option on the firm’s assets.