Question 1

Firms are least apt to 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) acquiring a competitor. 
A) selling major assets. 
B) merging with another firm. 
C) issuing new securities. 
D) exchanging debt for equity. 
E) acquiring a competitor. E

Question 2

Chapter 11 of the Federal Bankruptcy Reform Act of 1978:

Accepted Answer

A) was replaced by Section 363 in 2009. 
B) was expanded to allow liquidations in 2010 as a result of the financial crisis of 2008. 
C) underwent a major revision in 2011. 
D) was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act. 
E) has never been revised or amended. 
A) was replaced by Section 363 in 2009. 
B) was expanded to allow liquidations in 2010 as a result of the financial crisis of 2008. 
C) underwent a major revision in 2011. 
D) was amended in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act. 
E) has never been revised or amended. D

Question 3

Altman's revised model for private firms and non-manufacturers predicts bankruptcy when the computed value is:

Accepted Answer

A) negative. 
B) less than 1.23. 
C) greater than 1.0 and less than 1.23. 
D) greater than 2.50. 
E) greater than 2.90. 
A) negative. 
B) less than 1.23. 
C) greater than 1.0 and less than 1.23. 
D) greater than 2.50. 
E) greater than 2.90. B

Question 4

How does APR rank the following claims in a bankruptcy liquidation?

Accepted Answer

A) Administrative expenses,wages,government taxes,secured creditors,unsecured creditors,and stockholders 
B) Administrative expenses,wages,government taxes,stockholders,secured creditors,and unsecured creditors 
C) Wages,administrative expenses,secured creditors,unsecured creditors,government taxes,and stockholders 
D) Wages,administrative expenses,secured creditors,unsecured creditors,stockholders,and government taxes 
E) Government taxes,administrative expenses,wages,secured creditors,unsecured creditors,and stockholders 
A) Administrative expenses,wages,government taxes,secured creditors,unsecured creditors,and stockholders 
B) Administrative expenses,wages,government taxes,stockholders,secured creditors,and unsecured creditors 
C) Wages,administrative expenses,secured creditors,unsecured creditors,government taxes,and stockholders 
D) Wages,administrative expenses,secured creditors,unsecured creditors,stockholders,and government taxes 
E) Government taxes,administrative expenses,wages,secured creditors,unsecured creditors,and stockholders

Question 5

Financial distress may benefit firms if it prompts them to "restructure their assets".Explain what this means and how it can be beneficial.

Accepted Answer

"Restructure their assets" refers to ana

Question 6

In a Chapter 11 bankruptcy,a class of creditors is considered to have accepted the bankruptcy plan when:

Accepted Answer

A) two-thirds of the class in dollar amount agree. 
B) at least 51 percent of the class in number agree. 
C) at least 90 percent of the members of the class agree. 
D) at least 51 percent of the class in dollar amount and two-thirds of the class in number agree. 
E) one-half of the class in number and two-thirds of the class in dollar amount agree. 
A) two-thirds of the class in dollar amount agree. 
B) at least 51 percent of the class in number agree. 
C) at least 90 percent of the members of the class agree. 
D) at least 51 percent of the class in dollar amount and two-thirds of the class in number agree. 
E) one-half of the class in number and two-thirds of the class in dollar amount agree.

Question 7

AJ's Markets is being liquidated.The mortgage holder is owed $830,000,the other secured creditors are owed $128,000,and the unsecured creditors are owed $329,000.Administrative costs of liquidation,wage and benefit payments,and consumer claims amount to $330,000.The firm owes no taxes.The building,which is mortgaged,just netted $794,000 after sale costs.The remaining assets have yielded $467,000 in net proceeds.How much will the unsecured creditors receive per each dollar they are owed?

Accepted Answer

A) $.027 
B) $.025 
C) $.333 
D) $1.00 
E) $.533 
A) $.027 
B) $.025 
C) $.333 
D) $1.00 
E) $.533

Question 8

There are a number of ways firms can deal with financial distress.Identify at least 5 of these.

Accepted Answer

Firms can deal with financial distress b

Question 9

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 the firm is $3.2 million.The senior debt claim is on all fixed assets.The balance sheet of the firm has current assets of $1.1 million,fixed assets of $2.9 million,senior debt of $2.2 million,subordinated debt of $1.8 million,with the remainder allocated to stockholders' equity. Assume the firm files for formal bankruptcy and sells the firm for the estimated "going concern" value and nets 92 percent of that amount after administrative costs,wages,and taxes are paid.What amount will be distributed to the subordinated debtholders?

Accepted Answer

A) $709,000 
B) $721,000 
C) $744,000 
D) $811,000 
E) $687,000 
A) $709,000 
B) $721,000 
C) $744,000 
D) $811,000 
E) $687,000

Question 10

The difference between liquidation and reorganization is that a:

Accepted Answer

A) reorganization terminates all operations of the firm while a liquidation only terminates non-profitable operations. 
B) liquidation terminates all operations immediately while a reorganization terminates operations over two,or more,years. 
C) liquidation terminates all operations and a reorganization maintains the option of the firm as a going concern. 
D) liquidation deals with net working capital while a reorganization deals with long-term liabilities. 
E) a liquidation must occur outside of bankruptcy while a reorganization involves the bankruptcy process. 
A) reorganization terminates all operations of the firm while a liquidation only terminates non-profitable operations. 
B) liquidation terminates all operations immediately while a reorganization terminates operations over two,or more,years. 
C) liquidation terminates all operations and a reorganization maintains the option of the firm as a going concern. 
D) liquidation deals with net working capital while a reorganization deals with long-term liabilities. 
E) a liquidation must occur outside of bankruptcy while a reorganization involves the bankruptcy process.

Question 11

Stock-based insolvency is a(n):

Accepted Answer

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

Question 12

Which one of these statements correctly identifies a condition which must be met for creditors to force a firm into involuntary bankruptcy?

Accepted Answer

A) The creditors that represent 30 percent or more of the firm's debt must agree on a plan prior to filing the involuntary petition. 
B) The firm must be at least 120 days delinquent in its debt payments. 
C) At least one-third of a firm's known creditors must participate in the filing. 
D) If there are more than a dozen creditors,then at least three with claims totaling $13,475 or more must participate in the filing. 
E) Any individual creditor that is owed $5,000 or more can file an involuntary petition regardless of the number of total creditors. 
A) The creditors that represent 30 percent or more of the firm's debt must agree on a plan prior to filing the involuntary petition. 
B) The firm must be at least 120 days delinquent in its debt payments. 
C) At least one-third of a firm's known creditors must participate in the filing. 
D) If there are more than a dozen creditors,then at least three with claims totaling $13,475 or more must participate in the filing. 
E) Any individual creditor that is owed $5,000 or more can file an involuntary petition regardless of the number of total creditors.

Question 13

Altman initially developed 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 implies bankruptcy within one year. 
B) in actual use,a Z-score greater than 1.81 implied a 90 percent 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) the lower the score the lower the chance of pending bankruptcy. 
A) in actual use,a Z-score greater than 2.99 implies bankruptcy within one year. 
B) in actual use,a Z-score greater than 1.81 implied a 90 percent 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) the lower the score the lower the chance of pending bankruptcy.

Question 14

Financial distress is least apt to lead to:

Accepted Answer

A) asset restructuring. 
B) financial restructuring. 
C) liquidation. 
D) increasing dividends. 
E) issuing new shares. 
A) asset restructuring. 
B) financial restructuring. 
C) liquidation. 
D) increasing dividends. 
E) issuing new shares.

Question 15

The major difference between Chapter 7 and Chapter 11 is that:

Accepted Answer

A) liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7. 
B) there is no priority of claims under Chapter 11. 
C) liquidation automatically occurs in Chapter 7 but may or may not occur under Chapter 11. 
D) no administrative or legal costs are incurred under Chapter 7. 
E) Chapter 11 is voluntary and Chapter 7 is involuntary. 
A) liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7. 
B) there is no priority of claims under Chapter 11. 
C) liquidation automatically occurs in Chapter 7 but may or may not occur under Chapter 11. 
D) no administrative or legal costs are incurred under Chapter 7. 
E) Chapter 11 is voluntary and Chapter 7 is involuntary.

Question 16

Which one of the following is most apt to protect an individual creditor's interests in a formal bankruptcy proceeding?

Accepted Answer

A) The bankrupt firm's financial structure may be complicated with several groups and types of creditors. 
B) The indirect costs of bankruptcy may result in lost revenues and poor maintenance. 
C) The bankruptcy administrative costs may be high due to the length and complexity of the process. 
D) The absolute priority rule can be violated. 
E) The creditor may hold liens on specific assets. 
A) The bankrupt firm's financial structure may be complicated with several groups and types of creditors. 
B) The indirect costs of bankruptcy may result in lost revenues and poor maintenance. 
C) The bankruptcy administrative costs may be high due to the length and complexity of the process. 
D) The absolute priority rule can be violated. 
E) The creditor may hold liens on specific assets.

Question 17

Credit scoring models are used by lenders to determine:

Accepted Answer

A) the best discount to offer each customer. 
B) the appropriate price to charge each customer. 
C) the optimal debt-equity ratio for the firm. 
D) a borrower's credit risk. 
E) the percentage of their loan that will be repaid in a bankruptcy. 
A) the best discount to offer each customer. 
B) the appropriate price to charge each customer. 
C) the optimal debt-equity ratio for the firm. 
D) a borrower's credit risk. 
E) the percentage of their loan that will be repaid in a bankruptcy.

Question 18

Some of the key reasons why a firm would choose a formal bankruptcy over a private workout include all the following except the:

Accepted Answer

A) issuance of debtor-in-possession debt. 
B) tax treatment of tax loss carryforwards. 
C) tax treatment of debt forgiveness. 
D) ability to issue new debt that is senior to all prior debts. 
E) higher priority given to the existing stockholders. 
A) issuance of debtor-in-possession debt. 
B) tax treatment of tax loss carryforwards. 
C) tax treatment of debt forgiveness. 
D) ability to issue new debt that is senior to all prior debts. 
E) higher priority given to the existing stockholders.

Question 19

Private workouts generally:

Accepted Answer

A) represent 75 percent of all financial restructurings. 
B) lead to lower stock price increases than formal bankruptcy reorganizations. 
C) exchange current financial securities for new securities. 
D) are more costly than formal bankruptcies. 
E) increase management salaries and provide employment guarantees. 
A) represent 75 percent of all financial restructurings. 
B) lead to lower stock price increases than formal bankruptcy reorganizations. 
C) exchange current financial securities for new securities. 
D) are more costly than formal bankruptcies. 
E) increase management salaries and provide employment guarantees.

Question 20

APR,as it relates to the liquidation of a firm,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.

Exam 30: Financial Distress

Firms are least apt to deal with financial distress by:

Chapter 11 of the Federal Bankruptcy Reform Act of 1978:

Altman's revised model for private firms and non-manufacturers predicts bankruptcy when the computed value is:

How does APR rank the following claims in a bankruptcy liquidation?

Financial distress may benefit firms if it prompts them to "restructure their assets".Explain what this means and how it can be beneficial.

In a Chapter 11 bankruptcy,a class of creditors is considered to have accepted the bankruptcy plan when:

There are a number of ways firms can deal with financial distress.Identify at least 5 of these.

The difference between liquidation and reorganization is that a:

Stock-based insolvency is a(n):

Which one of these statements correctly identifies a condition which must be met for creditors to force a firm into involuntary bankruptcy?

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

Financial distress is least apt to lead to:

The major difference between Chapter 7 and Chapter 11 is that:

Which one of the following is most apt to protect an individual creditor's interests in a formal bankruptcy proceeding?

Credit scoring models are used by lenders to determine:

Some of the key reasons why a firm would choose a formal bankruptcy over a private workout include all the following except the:

Private workouts generally:

APR,as it relates to the liquidation of a firm,means the rules of:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

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

Lessons From Market History

Return, risk, and 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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