Question 1

Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:

Accepted Answer

A)  that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7. 
B)  that there is no priority of claims under Chapter 11. 
C)  that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11. 
D)  no lawyers' fees are necessary under Chapter 7. 
E)  None of these. 
A)  that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7. 
B)  that there is no priority of claims under Chapter 11. 
C)  that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11. 
D)  no lawyers' fees are necessary under Chapter 7. 
E)  None of these. C

Question 2

The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is based on a going-concern value of $2 million. The proposed financial structure is $750,000 in new mortgage debt,$250,000 in subordinated debt and $1,000,000 in new equity. All creditors,both secured and unsecured,are owed $2.5 million dollars. Secured creditors have a mortgage lien for $1,500,000 on the factory. The corporate tax rate is 34%. How much should the unsecured creditors receive?

Accepted Answer

A)  $500,000 
B)  $667,000 
C)  $750,000 
D)  $1,000,000 
E)  None of these. 
A)  $500,000 
B)  $667,000 
C)  $750,000 
D)  $1,000,000 
E)  None of these. A

Question 3

Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?

Accepted Answer

A)  Cash payments are delayed to creditors. 
B)  The market value of the stock declines by 10%. 
C)  The firm's operating cash flow is insufficient to pay current obligations. 
D)  Cash distributions are eliminated because the board of directors considers the surplus account to be low. 
E)  None of these. 
A)  Cash payments are delayed to creditors. 
B)  The market value of the stock declines by 10%. 
C)  The firm's operating cash flow is insufficient to pay current obligations. 
D)  Cash distributions are eliminated because the board of directors considers the surplus account to be low. 
E)  None of these. C

Question 4

Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:

Accepted Answer

A)  forcing a firm to reevaluate their core operations. 
B)  realigning their capital structure to reduce interest costs. 
C)  entering Chapter 11 and liquidating the firm. 
D)  Both forcing a firm to reevaluate their core operations; and realigning their capital structure to reduce interest costs. 
E)  Both forcing a firm to reevaluate their core operations; and entering Chapter 11 and liquidating the firm. 
A)  forcing a firm to reevaluate their core operations. 
B)  realigning their capital structure to reduce interest costs. 
C)  entering Chapter 11 and liquidating the firm. 
D)  Both forcing a firm to reevaluate their core operations; and realigning their capital structure to reduce interest costs. 
E)  Both forcing a firm to reevaluate their core operations; and entering Chapter 11 and liquidating the firm.

Question 5

Which of the following statements about private workouts of financial distress is NOT true?

Accepted Answer

A)  Senior debt is usually replaced with junior debt. 
B)  Debt is usually replaced with equity. 
C)  Private workouts account for about three quarters of all reorganizations. 
D)  Top management is often dismissed or takes pay reductions. 
E)  None of these. 
A)  Senior debt is usually replaced with junior debt. 
B)  Debt is usually replaced with equity. 
C)  Private workouts account for about three quarters of all reorganizations. 
D)  Top management is often dismissed or takes pay reductions. 
E)  None of these.

Question 6

The management of Schroeder Books has proposed to reorganize the company. The proposal is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000 in new mortgage debt,$300,000 in subordinated debt and $1,500,000 in new equity. All creditors,both secured and unsecured,are owed $3 million dollars. Secured creditors have a mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?

Accepted Answer

A)  $0 
B)  $35,714 
C)  $583,333 
D)  $1,000,000 
E)  None of these. 
A)  $0 
B)  $35,714 
C)  $583,333 
D)  $1,000,000 
E)  None of these.

Question 7

The management of Patricia's Paddle Boats has proposed to reorganize the firm. The proposal is based on a going-concern value of $2,100,000. The proposed financial structure is $1,000,000 in new mortgage debt,$100,000 in subordinated debt and $1,000,000 in new equity. All creditors,both secured and unsecured,are owed $2,500,000. Secured creditors have a mortgage lien for $1,300,000 on the factory. The corporate tax rate is 34%. How much should the secured creditors receive?

Accepted Answer

A)  $100,000 
B)  $1,000,000 
C)  $1,100,000 
D)  $1,300,000 
E)  None of these. 
A)  $100,000 
B)  $1,000,000 
C)  $1,100,000 
D)  $1,300,000 
E)  None of these.

Question 8

Very small firms are more likely to:

Accepted Answer

A)  file for strategic bankruptcy. 
B)  file for bankruptcy protection earlier than large firms. 
C)  reorganize than liquidate compared to large firms. 
D)  liquidate than reorganize compared to large firms. 
E)  None of these. 
A)  file for strategic bankruptcy. 
B)  file for bankruptcy protection earlier than large firms. 
C)  reorganize than liquidate compared to large firms. 
D)  liquidate than reorganize compared to large firms. 
E)  None of these.

Question 9

A large negative equity position will lead a firm to be more likely to try to:

Accepted Answer

A)  not file bankruptcy. 
B)  liquidate. 
C)  reorganize. 
D)  consolidate. 
E)  None of these. 
A)  not file bankruptcy. 
B)  liquidate. 
C)  reorganize. 
D)  consolidate. 
E)  None of these.

Question 10

The management of Patricia's Paddle Boats has proposed to reorganize the firm. The proposal is based on a going-concern value of $2,100,000. The proposed financial structure is $1,000,000 in new mortgage debt,$100,000 in subordinated debt and $1,000,000 in new equity. All creditors,both secured and unsecured,are owed $2,500,000. Secured creditors have a mortgage lien for $1,300,000 on the factory. The corporate tax rate is 34%. How much should the unsecured creditors receive?

Accepted Answer

A)  $600,000 
B)  $667,000 
C)  $900,000 
D)  $1,000,000 
E)  None of these. 
A)  $600,000 
B)  $667,000 
C)  $900,000 
D)  $1,000,000 
E)  None of these.

Question 11

Equityholders may prefer a formal bankruptcy filing because:

Accepted Answer

A)  the firm can issue debtor in possession debt. 
B)  the firm can delay pre-bankruptcy interest payments. 
C)  the lack of information about the length and magnitude of the cash flow problem favors equityholders. 
D)  All of these. 
E)  None of these. 
A)  the firm can issue debtor in possession debt. 
B)  the firm can delay pre-bankruptcy interest payments. 
C)  the lack of information about the length and magnitude of the cash flow problem favors equityholders. 
D)  All of these. 
E)  None of these.

Question 12

Insolvency can be defined as:

Accepted Answer

A)  not having cash. 
B)  being illiquid. 
C)  an inability to pay one's debts. 
D)  an inability to increase one's debts. 
E)  the present value of payments being less than assets. 
A)  not having cash. 
B)  being illiquid. 
C)  an inability to pay one's debts. 
D)  an inability to increase one's debts. 
E)  the present value of payments being less than assets.

Question 13

The key intuition of a Z-score model like Altman's is that:

Accepted Answer

A)  only publicly traded firms can be evaluated. 
B)  one will be just as well off by guessing on default rates. 
C)  all corporations will default at least once. 
D)  financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy. 
E)  privately traded firms have better financial information which are disclosed to lenders and need not rely on any efficient market notions. 
A)  only publicly traded firms can be evaluated. 
B)  one will be just as well off by guessing on default rates. 
C)  all corporations will default at least once. 
D)  financial profiles of bankrupt and non-bankrupt firms are very different one year before bankruptcy. 
E)  privately traded firms have better financial information which are disclosed to lenders and need not rely on any efficient market notions.

Question 14

Patricia's Paddle Boats is to be liquidated. All creditors,both secured and unsecured,are owed $2,100,000. Administrative costs of liquidation and wage payments are expected to be $750,000. A sale of assets is expected to bring $2,500,000 after taxes. Secured creditors have a mortgage lien for $1,900,000 on the factory which will be liquidated for $1,200,000 out of the sale proceeds. The corporate tax rate is 40%. How much and what percentage of their claim will the unsecured creditors receive,in total?

Accepted Answer

A)  $100,000; 25.00% 
B)  $122,222; 61.11% 
C)  $166,666; 77.50% 
D)  $200,000; 100.00% 
E)  Not enough information to answer 
A)  $100,000; 25.00% 
B)  $122,222; 61.11% 
C)  $166,666; 77.50% 
D)  $200,000; 100.00% 
E)  Not enough information to answer

Question 15

A firm in financial distress that reorganizes:

Accepted Answer

A)  continues to run the business as a going concern. 
B)  must have acceptance of the plan by the creditors. 
C)  may distribute new securities to creditors and shareholders. 
D)  All of these. 
E)  None of these. 
A)  continues to run the business as a going concern. 
B)  must have acceptance of the plan by the creditors. 
C)  may distribute new securities to creditors and shareholders. 
D)  All of these. 
E)  None of these.

Question 16

Flow-based insolvency is:

Accepted Answer

A)  a balance sheet measurement. 
B)  a negative equity position. 
C)  when operating cash flow is insufficient to meet current obligations. 
D)  inability to pay one's debts. 
E)  Both when operating cash flow is insufficient to meet current obligations and inability to pay one's debts. 
A)  a balance sheet measurement. 
B)  a negative equity position. 
C)  when operating cash flow is insufficient to meet current obligations. 
D)  inability to pay one's debts. 
E)  Both when operating cash flow is insufficient to meet current obligations and inability to pay one's debts.

Question 17

Firms deal with financial distress by:

Accepted Answer

A)  selling major assets. 
B)  merging with another firm. 
C)  issuing new securities. 
D)  exchanging debt for equity. 
E)  All of 
A)  selling major assets. 
B)  merging with another firm. 
C)  issuing new securities. 
D)  exchanging debt for equity. 
E)  All of

Question 18

Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:

Accepted Answer

A)  take up to 120 days to file a reorganization plan. 
B)  continue to run the business. 
C)  reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place. 
D)  All of these. 
E)  None of these. 
A)  take up to 120 days to file a reorganization plan. 
B)  continue to run the business. 
C)  reorganize if the required fractions of creditors approve of the plan and it is confirmed when the reorganization takes place. 
D)  All of these. 
E)  None of these.

Question 19

Altman's Z-score predicts the:

Accepted Answer

A)  percentage of payout to equityholders in liquidations. 
B)  percentage of payout to equityholders in reorganization. 
C)  likelihood of a private workout. 
D)  likelihood of bankruptcy of a firm within one year. 
E)  None of these. 
A)  percentage of payout to equityholders in liquidations. 
B)  percentage of payout to equityholders in reorganization. 
C)  likelihood of a private workout. 
D)  likelihood of bankruptcy of a firm within one year. 
E)  None of these.

Question 20

Magic Mobile Homes is to be liquidated. All creditors,both secured and unsecured,are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000. A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%. How much and what percentage of their claim will the unsecured creditors receive,in total?

Accepted Answer

A)  $100,000; 12.50% 
B)  $290,909; 36.36% 
C)  $300,000; 37.50% 
D)  $600,000; 75.00% 
E)  Not enough information to answer 
A)  $100,000; 12.50% 
B)  $290,909; 36.36% 
C)  $300,000; 37.50% 
D)  $600,000; 75.00% 
E)  Not enough information to answer

Exam 30: Financial Distress

Whether bankruptcy is entered voluntarily or involuntarily the major difference between Chapter 7 and Chapter 11 is:

Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?

Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit from distress by:

Which of the following statements about private workouts of financial distress is NOT true?

Very small firms are more likely to:

A large negative equity position will lead a firm to be more likely to try to:

Equityholders may prefer a formal bankruptcy filing because:

Insolvency can be defined as:

The key intuition of a Z-score model like Altman's is that:

A firm in financial distress that reorganizes:

Flow-based insolvency is:

Firms deal with financial distress by:

Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the management can:

Altman's Z-score predicts the:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

International Corporate Finance

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