Question 1

Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.

Accepted Answer

A)  0% 
B)  15% 
C)  25% 
D)  50% 
E)  85% 
A)  0% 
B)  15% 
C)  25% 
D)  50% 
E)  85%

Question 2

The absolute priority rule:

Accepted Answer

A)  is set to ensure senior claims are paid first. 
B)  is the priority rule in liquidations. 
C)  distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured. 
D)  All of these. 
E)  None of these. 
A)  is set to ensure senior claims are paid first. 
B)  is the priority rule in liquidations. 
C)  distributes proceeds of secured assets sales to the secured creditors first and the remainder to the unsecured. 
D)  All of these. 
E)  None of these.

Question 3

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%. 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 4

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 secured creditors receive?

Accepted Answer

A)  $1,500,000 
B)  $2,000,000 
C)  $2,300,000 
D)  $3,000,000 
E)  None of these. 
A)  $1,500,000 
B)  $2,000,000 
C)  $2,300,000 
D)  $3,000,000 
E)  None of these.

Question 5

A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?

Accepted Answer

A)  After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors. 
B)  After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder. 
C)  After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder. 
D)  After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake. 
E)  None of these. 
A)  After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors. 
B)  After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and then the shareholders divide any remainder. 
C)  After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder. 
D)  After the trustee liquidates the assets the shareholders are paid first because they are the owners of the firm and have the principal stake. 
E)  None of these.

Question 6

Perhaps equally,if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:

Accepted Answer

A)  loss of current customers. 
B)  loss of business reputation. 
C)  management consumed in survival and not on a strategic direction. 
D)  All of these. 
E)  Both loss of current customers and loss of business reputation. 
A)  loss of current customers. 
B)  loss of business reputation. 
C)  management consumed in survival and not on a strategic direction. 
D)  All of these. 
E)  Both loss of current customers and loss of business reputation.

Question 7

In a prepackaged bankruptcy the firm:

Accepted Answer

A)  and creditors agree to a private reorganization outside formal bankruptcy. 
B)  must reach agreement privately with most of the creditors. 
C)  will have difficulty when there are thousands of reluctant trade creditors. 
D)  All of these. 
E)  None of these. 
A)  and creditors agree to a private reorganization outside formal bankruptcy. 
B)  must reach agreement privately with most of the creditors. 
C)  will have difficulty when there are thousands of reluctant trade creditors. 
D)  All of these. 
E)  None of these.

Question 8

When choosing between liquidation and reorganization,what are some of the empirical factors that lead a firm toward one choice or the other?

Accepted Answer

Student answers will vary but they shoul

Question 9

Prepackaged bankruptcies are:

Accepted Answer

A)  described as a combination of a private workout and a liquidation. 
B)  the easiest way to transfer wealth to the shareholders. 
C)  described as a combination of a completed private workout and the formal bankruptcy filing. 
D)  All of these. 
E)  None of these. 
A)  described as a combination of a private workout and a liquidation. 
B)  the easiest way to transfer wealth to the shareholders. 
C)  described as a combination of a completed private workout and the formal bankruptcy filing. 
D)  All of these. 
E)  None of these.

Question 10

The net payoff to creditors in formal bankruptcy may be low in present value terms because:

Accepted Answer

A)  the financial structure may be complicated with several groups and types of creditors. 
B)  indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance. 
C)  administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process. 
D)  All of these. 
E)  None of these. 
A)  the financial structure may be complicated with several groups and types of creditors. 
B)  indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance. 
C)  administrative costs are high and increase with the complexity and length of time in the formal bankruptcy process. 
D)  All of these. 
E)  None of these.

Question 11

Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis,he found that:

Accepted Answer

A)  in actual use, a Z-score greater than 2.99 meant bankruptcy within one year. 
B)  in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year. 
C)  in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year. 
D)  in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year. 
E)  None of these. 
A)  in actual use, a Z-score greater than 2.99 meant bankruptcy within one year. 
B)  in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year. 
C)  in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year. 
D)  in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year. 
E)  None of these.

Question 12

The Steel Pony Company,a maker of all-terrain recreational vehicles,is having financial difficulties due to high interest payments. The estimated "going concern" value of Steel Pony is $4.0 million. The senior debt claim is on all fixed assets. The balance sheet of the firm is as shown:
If Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amount to 5% of the total going concern value,determine the distribution of the proceeds under the rules of absolute priority.

Accepted Answer

Administrative expenses .05($4

Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.

The absolute priority rule:

A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?

Perhaps equally,if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:

In a prepackaged bankruptcy the firm:

When choosing between liquidation and reorganization,what are some of the empirical factors that lead a firm toward one choice or the other?

Prepackaged bankruptcies are:

The net payoff to creditors in formal bankruptcy may be low in present value terms because:

Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis,he found that:

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

Filters

Exam 30: Financial Distress

Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully reorganize.

The absolute priority rule:

A corporation is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?

Perhaps equally,if not more damaging are the indirect costs of financial distress. Some examples of indirect costs are:

In a prepackaged bankruptcy the firm:

When choosing between liquidation and reorganization,what are some of the empirical factors that lead a firm toward one choice or the other?

Prepackaged bankruptcies are:

The net payoff to creditors in formal bankruptcy may be low in present value terms because:

Altman develop the Z-score model for publicly traded manufacturing firms. Using financial statement data and multiple discriminant analysis,he found that:

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

Filters