Question 1

A firm that has a series of negative earnings,sales declines and workforce reductions is likely headed to:

Accepted Answer

A)  acquisition of another firm. 
B)  a merger. 
C)  financial distress. 
D)  new financing. 
E)  None of these. 
A)  acquisition of another firm. 
B)  a merger. 
C)  financial distress. 
D)  new financing. 
E)  None of these.

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 secured creditors receive?

Accepted Answer

A)  $1,000,000 
B)  $1,250,000 
C)  $1,333,333 
D)  $1,500,000 
E)  None of these. 
A)  $1,000,000 
B)  $1,250,000 
C)  $1,333,333 
D)  $1,500,000 
E)  None of these.

Question 3

The Here Today Corporation has applied to your bank for a loan. You have their financial statements and the revised Z-score model of:
Z = 6.56 (Net Working Capital/Total Assets) + 3.26 (Accumulated Retained Earnings/Total Assets) + 1.05 (EBIT/Total Assets) + 6.72 (Book Value of Equity/Total Liabilities) where:
Z < 1.23 predicts bankruptcy. A Z score between 1.23 and 2.90 indicates gray area. A Z score greater than 2.90 indicates no bankruptcy. From the financial statements you gathered net working capital of $237,500; accumulated retained earnings of $120,000; book value of equity of $950,000; total assets of $4,750,000; EBIT of $261,250; and total liabilities of $3,800,000. Should the bank lend to Here Today?

Accepted Answer

Z = 6.56($237,500/$4,750,000) + 3.26($12

Question 4

APR,as it relates to financial distress,means the rules of:

Accepted Answer

A)  absolute profitability. 
B)  arbitration priority. 
C)  absolute priority. 
D)  arbitration profitability. 
E)  automatic profitability. 
A)  absolute profitability. 
B)  arbitration priority. 
C)  absolute priority. 
D)  arbitration profitability. 
E)  automatic profitability.

Question 5

Credit scoring models are used by lenders to:

Accepted Answer

A)  determine the borrowers capacity to pay. 
B)  aid in the prediction of default or bankruptcy. 
C)  determine the optimal debt equity ratio. 
D)  Both determine the borrowers capacity to pay and aid in the prediction of default or bankruptcy. 
E)  Both determine the borrowers capacity to pay and determine the optimal debt equity ratio. 
A)  determine the borrowers capacity to pay. 
B)  aid in the prediction of default or bankruptcy. 
C)  determine the optimal debt equity ratio. 
D)  Both determine the borrowers capacity to pay and aid in the prediction of default or bankruptcy. 
E)  Both determine the borrowers capacity to pay and determine the optimal debt equity ratio.

Question 6

Financial distress can involve which of the following:

Accepted Answer

A)  asset restructuring. 
B)  financial restructuring. 
C)  liquidation. 
D)  All of these. 
E)  None of these. 
A)  asset restructuring. 
B)  financial restructuring. 
C)  liquidation. 
D)  All of these. 
E)  None of these.

Question 7

Some of the various events which typically occur around the period of financial distress for a firm are:

Accepted Answer

A)  continued increase in earnings. 
B)  steady growth. 
C)  dividend reductions. 
D)  Both continued increase in earnings and steady growth. 
E)  Both continued increase in earnings and dividend reductions. 
A)  continued increase in earnings. 
B)  steady growth. 
C)  dividend reductions. 
D)  Both continued increase in earnings and steady growth. 
E)  Both continued increase in earnings and dividend reductions.

Question 8

Financial restructuring can occur as:

Accepted Answer

A)  a private workout. 
B)  an employee buy-out. 
C)  a bankruptcy reorganization. 
D)  Both a private workout and a bankruptcy reorganization. 
E)  Both an employee buy-out and a bankruptcy reorganization. 
A)  a private workout. 
B)  an employee buy-out. 
C)  a bankruptcy reorganization. 
D)  Both a private workout and a bankruptcy reorganization. 
E)  Both an employee buy-out and a bankruptcy reorganization.

Question 9

If a firm has a stock based insolvency in both book and market value terms and liquidates:

Accepted Answer

A)  the payoff will not be 100% to all investors. 
B)  the unsecured creditors are likely to get less than full value. 
C)  the equityholders typically should receive nothing. 
D)  All of these. 
E)  None of these. 
A)  the payoff will not be 100% to all investors. 
B)  the unsecured creditors are likely to get less than full value. 
C)  the equityholders typically should receive nothing. 
D)  All of these. 
E)  None of these.

Question 10

What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?

Accepted Answer

A)  Administrative expenses, wages claims, government tax claims, debtholder and then equityholder claims 
B)  Administrative expenses, wages claims, government tax claims, equityholder and then debtholder claims 
C)  Wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claims 
D)  Wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claims 
E)  None of these. 
A)  Administrative expenses, wages claims, government tax claims, debtholder and then equityholder claims 
B)  Administrative expenses, wages claims, government tax claims, equityholder and then debtholder claims 
C)  Wage claims, administrative expenses, debtholder claims, government tax claims and equityholder claims 
D)  Wage claims, administrative expenses, debtholder claims, equityholder claims and government tax claims 
E)  None of these.

Question 11

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%. 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 12

Successful private workouts are better for firms than formal bankruptcy because:

Accepted Answer

A)  direct costs are considerably lower in private workouts. 
B)  private workout firms can issue new debt senior to all prior debt. 
C)  stock price increases are greater for private workouts than for firms emerging from formal bankruptcy. 
D)  Both direct costs are considerably lower in private workouts; and private workout firms can issue new debt senior to all prior debt. 
E)  Both direct costs are considerably lower in private workouts; and stock price increases are greater for private workouts than for firms emerging from formal bankruptcy. 
A)  direct costs are considerably lower in private workouts. 
B)  private workout firms can issue new debt senior to all prior debt. 
C)  stock price increases are greater for private workouts than for firms emerging from formal bankruptcy. 
D)  Both direct costs are considerably lower in private workouts; and private workout firms can issue new debt senior to all prior debt. 
E)  Both direct costs are considerably lower in private workouts; and stock price increases are greater for private workouts than for firms emerging from formal bankruptcy.

Question 13

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 secured creditors receive,in total?

Accepted Answer

A)  $900,000; 47.37% 
B)  $1,250,000; 65.79% 
C)  1,627,777; 85.67% 
D)  $1,900,000; 100% 
E)  Not enough information to answer. 
A)  $900,000; 47.37% 
B)  $1,250,000; 65.79% 
C)  1,627,777; 85.67% 
D)  $1,900,000; 100% 
E)  Not enough information to answer.

Question 14

Bankruptcy reorganizations are used by management to:

Accepted Answer

A)  forestall the inevitable liquidation in all cases. 
B)  provide time to turn the business around. 
C)  allow the courts time to set up an administrative structure. 
D)  All of these. 
E)  None of these. 
A)  forestall the inevitable liquidation in all cases. 
B)  provide time to turn the business around. 
C)  allow the courts time to set up an administrative structure. 
D)  All of these. 
E)  None of these.

Question 15

Stock-based insolvency is a:

Accepted Answer

A)  income statement measurement. 
B)  balance sheet measurement. 
C)  a book value measurement only. 
D)  Both income statement measurement and a book value measurement only. 
E)  Both balance sheet measurement and a book value measurement only. 
A)  income statement measurement. 
B)  balance sheet measurement. 
C)  a book value measurement only. 
D)  Both income statement measurement and a book value measurement only. 
E)  Both balance sheet measurement and a book value measurement only.

Question 16

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%. How much should the unsecured creditors receive?

Accepted Answer

A)  $300,000 
B)  $500,000 
C)  $1,000,000 
D)  $2,300,000 
E)  None of these. 
A)  $300,000 
B)  $500,000 
C)  $1,000,000 
D)  $2,300,000 
E)  None of these.

Question 17

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 secured creditors receive,in total?

Accepted Answer

A)  $900,000; 75% 
B)  $981,818; 81.82% 
C)  $1,009,091; 84.1% 
D)  $1,200,000; 100% 
E)  Not enough information to answer. 
A)  $900,000; 75% 
B)  $981,818; 81.82% 
C)  $1,009,091; 84.1% 
D)  $1,200,000; 100% 
E)  Not enough information to answer.

Question 18

A firm has several options available to it in times of financial distress. The firm may:

Accepted Answer

A)  reduce capital and R & D spending. 
B)  raise new funds by selling securities or major assets. 
C)  file for bankruptcy. 
D)  negotiate with lenders. 
E)  All of these statements are truE. 
A)  reduce capital and R & D spending. 
B)  raise new funds by selling securities or major assets. 
C)  file for bankruptcy. 
D)  negotiate with lenders. 
E)  All of these statements are truE.

Question 19

Financial distress may be more expensive if the:

Accepted Answer

A)  information about the permanency of the shortfall is limited. 
B)  firm has many different types of creditors and other investors. 
C)  firm has never entered into bankruptcy before. 
D)  Both information about the permanency of the shortfall is limited; and firm has many different types of creditors and other investors. 
E)  Both firm has many different types of creditors and other investors; and firm has never entered into bankruptcy beforE. 
A)  information about the permanency of the shortfall is limited. 
B)  firm has many different types of creditors and other investors. 
C)  firm has never entered into bankruptcy before. 
D)  Both information about the permanency of the shortfall is limited; and firm has many different types of creditors and other investors. 
E)  Both firm has many different types of creditors and other investors; and firm has never entered into bankruptcy beforE.

Question 20

The difference between liquidation and reorganization is:

Accepted Answer

A)  reorganization terminates all operations of the firm and liquidation only terminates non-profitable operations. 
B)  liquidation terminates only profitable operations and reorganization terminates only non-profitable operations. 
C)  liquidation terminates all operations and reorganization maintains the option of the firm as a going concern. 
D)  liquidation only deals with current assets and reorganization only consolidates debt. 
E)  None of these. 
A)  reorganization terminates all operations of the firm and liquidation only terminates non-profitable operations. 
B)  liquidation terminates only profitable operations and reorganization terminates only non-profitable operations. 
C)  liquidation terminates all operations and reorganization maintains the option of the firm as a going concern. 
D)  liquidation only deals with current assets and reorganization only consolidates debt. 
E)  None of these.

Exam 30: Financial Distress

A firm that has a series of negative earnings,sales declines and workforce reductions is likely headed to:

APR,as it relates to financial distress,means the rules of:

Credit scoring models are used by lenders to:

Financial distress can involve which of the following:

Some of the various events which typically occur around the period of financial distress for a firm are:

Financial restructuring can occur as:

If a firm has a stock based insolvency in both book and market value terms and liquidates:

What is the absolute priority rule of the following claims once a corporation is determined to be bankrupt?

Successful private workouts are better for firms than formal bankruptcy because:

Bankruptcy reorganizations are used by management to:

Stock-based insolvency is a:

A firm has several options available to it in times of financial distress. The firm may:

Financial distress may be more expensive if the:

The difference between liquidation and reorganization is:

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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