Question 1

Why would a firm's creditors voluntarily agree to a prepackaged reorganization that offers those creditors less than they are owed?

Accepted Answer

Creditors will agree with a prepack when

Question 2

A Chapter 7 bankruptcy involves all the following except:

Accepted Answer

A) filing a petition in federal court. 
B) issuing new equity securities to current shareholders. 
C) the appointing of a bankruptcy trustee. 
D) administration costs. 
E) distribution of liquidation proceeds. 
A) filing a petition in federal court. 
B) issuing new equity securities to current shareholders. 
C) the appointing of a bankruptcy trustee. 
D) administration costs. 
E) distribution of liquidation proceeds.

Question 3

A firm in financial distress that reorganizes through the bankruptcy process:

Accepted Answer

A) will continue to operate as a going concern throughout the entire process. 
B) must only have the reorganization plan approved by its primary creditor. 
C) cannot issue new securities to either creditors or shareholders. 
D) must file a reorganization plan within 90 days of filing the bankruptcy petition. 
E) must abide by the Section 363 provisions of Chapter 11. 
A) will continue to operate as a going concern throughout the entire process. 
B) must only have the reorganization plan approved by its primary creditor. 
C) cannot issue new securities to either creditors or shareholders. 
D) must file a reorganization plan within 90 days of filing the bankruptcy petition. 
E) must abide by the Section 363 provisions of Chapter 11.

Question 4

Insolvency can be defined as:

Accepted Answer

A) not having cash. 
B) having less cash than the firm needs for one year. 
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) having less cash than the firm needs for one year. 
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 5

Section 363 as it relates to a bankruptcy filing:

Accepted Answer

A) works like an auction to speed up the bankruptcy process. 
B) establishes the bankruptcy judge as the assignor of all bankruptcy assets. 
C) permits creditors to force a firm into an involuntary bankruptcy. 
D) allows creditors to submit a reorganization plan. 
E) requires all employee wages and benefits be paid prior to creditors. 
A) works like an auction to speed up the bankruptcy process. 
B) establishes the bankruptcy judge as the assignor of all bankruptcy assets. 
C) permits creditors to force a firm into an involuntary bankruptcy. 
D) allows creditors to submit a reorganization plan. 
E) requires all employee wages and benefits be paid prior to creditors.

Question 6

A firm is most likely experiencing financial distress when:

Accepted Answer

A) some of its cash customers begin to charge their purchases. 
B) the market value of the firm's stock declines by 10 percent in line with the market. 
C) the firm's operating cash flow is repeatedly insufficient to pay current obligations. 
D) its cash distributions are eliminated and replaced with stock repurchases. 
E) its accounts payable turnover rate increases. 
A) some of its cash customers begin to charge their purchases. 
B) the market value of the firm's stock declines by 10 percent in line with the market. 
C) the firm's operating cash flow is repeatedly insufficient to pay current obligations. 
D) its cash distributions are eliminated and replaced with stock repurchases. 
E) its accounts payable turnover rate increases.

Question 7

Welders Supply is reorganizing and has presented a proposal based on a going-concern value of $2 million after reorganization costs and delinquent wages,benefits,and taxes.The proposed financial structure is $750,000 in new mortgage debt,$250,000 in subordinated debt and $1,000,000 in new equity.Secured creditors currently have a mortgage lien for $1.5 million on the factory and the unsecured creditors' claims total $1.2 million.How much of the new debt and equity securities should the secured creditors receive?

Accepted Answer

A) $1.1 million 
B) $1.0 million 
C) $1.3 million 
D) $1.5 million 
E) $.75 million 
A) $1.1 million 
B) $1.0 million 
C) $1.3 million 
D) $1.5 million 
E) $.75 million

Question 8

Flow-based insolvency is defined as:

Accepted Answer

A) a balance sheet measurement. 
B) a negative equity position. 
C) a negative cash flow in any one period. 
D) a negative net profit for the year. 
E) an insufficient operating cash flow to meet current obligations. 
A) a balance sheet measurement. 
B) a negative equity position. 
C) a negative cash flow in any one period. 
D) a negative net profit for the year. 
E) an insufficient operating cash flow to meet current obligations.

Question 9

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) take any or all of the other actions. 
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) take any or all of the other actions.

Question 10

Sunshine Products is being liquidated.The real estate has been sold and there is a remaining mortgage balance of $126,000 after applying the sale proceeds.The other assets were just auctioned off and netted $418,000 after liquidation costs,wages,and taxes.The remaining secured creditors submitted claims totaling $362,000 and the unsecured creditor claims are $211,000.The secured creditors will receive ________ per $1 claim and the unsecured creditors will receive ________ per $1 claim.

Accepted Answer

A) $1; $.1309 
B) $.98; $0 
C) $1; $.1662 
D) $1; $.2654 
E) $1; $.0678 
A) $1; $.1309 
B) $.98; $0 
C) $1; $.1662 
D) $1; $.2654 
E) $1; $.0678

Question 11

A corporation is adjudged bankrupt under Chapter 7.Based on APR,shareholders receive payment,if funds are remaining,after the:

Accepted Answer

A) bankruptcy administrator but before the creditors. 
B) secured creditors but before the unsecured creditors. 
C) unsecured creditors but before the IRS. 
D) after the employees but before the IRS. 
E) after all other parties have been paid. 
A) bankruptcy administrator but before the creditors. 
B) secured creditors but before the unsecured creditors. 
C) unsecured creditors but before the IRS. 
D) after the employees but before the IRS. 
E) after all other parties have been paid.

Question 12

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 prior to bankruptcy. 
E) privately traded firms disclose better financial information to lenders. 
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 prior to bankruptcy. 
E) privately traded firms disclose better financial information to lenders.

Question 13

Pat's Boats is being liquidated.The administrative costs of liquidation,taxes,and wage payments are expected to be $450,000.Secured creditors have a mortgage lien for $1.4 million on the real estate which was just liquidated and netted proceeds of $1.2 million.The other secured creditors have submitted claims totaling $274,000 and the unsecured submitted claims are $323,000.The remaining assets are expected to net $475,000.What payout should the unsecured creditors expect per each $1 claim?

Accepted Answer

A) $.13 
B) $0 
C) $.08 
D) $.06 
E) $.02 
A) $.13 
B) $0 
C) $.08 
D) $.06 
E) $.02

Question 14

Periods of financial distress are most associated with:

Accepted Answer

A) continued increases in earnings. 
B) steady growth. 
C) dividend reductions. 
D) increasing growth rates. 
E) decreasing production costs. 
A) continued increases in earnings. 
B) steady growth. 
C) dividend reductions. 
D) increasing growth rates. 
E) decreasing production costs.

Question 15

Southern Goods has an estimated going-concern value of $2 million.As a result of negotiations the firm's bankruptcy reorganization plan consists of $600,000 in new mortgage debt,$250,000 in subordinated debt,and $1,150,000 in new equity.Currently the firm has a mortgage of $823,000,other secured debt of $89,000,and unsecured debt of $1.34 million.According to the APR,what will the stockholders receive if they currently have 2 million shares with a par value of $1 each?

Accepted Answer

A) $0 
B) $315,714 in new equity 
C) $583,333 in a combination of new debt and equity securities 
D) $1,150,000 in new equity 
E) $940,000 in new equity 
A) $0 
B) $315,714 in new equity 
C) $583,333 in a combination of new debt and equity securities 
D) $1,150,000 in new equity 
E) $940,000 in new equity

Question 16

Uptown Cleaners is being liquidated.The building has been sold for a net of $670,000 but the mortgage due is $738,000.The remaining assets were sold with net proceeds of $154,000.Administrative costs,wages and benefits,and consumer claims equal $136,000.The firm also owes $58,000 in taxes.The secured claims total $46,000 and the unsecured claims are $138,000.What percentage of their total claims will the secured creditors be paid?

Accepted Answer

A) 11.2 percent 
B) 8.8 percent 
C) 0 percent 
D) 41.2 percent 
E) 39.1 percent 
A) 11.2 percent 
B) 8.8 percent 
C) 0 percent 
D) 41.2 percent 
E) 39.1 percent

Question 17

The Beacon has proposed a reorganization plan based on a going-concern value of $1.3 million after court costs and delinquent wages and taxes.The proposed financial structure is $400,000 in new mortgage debt,$200,000 in subordinated debt,and $700,000 in new equity.Secured creditors currently have a mortgage lien for $600,000 and the unsecured creditors are owed $950,000.What should the unsecured creditors receive if the reorganization plan is approved?

Accepted Answer

A) $700,000 in equity securities 
B) $200,000 in subordinated debt and $700,000 in equity securities 
C) $950,000 in new equity securities 
D) 61.3 percent of the new mortgage debt,61.3 percent of the subordinated debt,and 61.3 percent of new equity 
E) 82.6 percent of the subordinated debt and 82.6 percent of new equity 
A) $700,000 in equity securities 
B) $200,000 in subordinated debt and $700,000 in equity securities 
C) $950,000 in new equity securities 
D) 61.3 percent of the new mortgage debt,61.3 percent of the subordinated debt,and 61.3 percent of new equity 
E) 82.6 percent of the subordinated debt and 82.6 percent of new equity

Question 18

Most firms in financial distress do not fail or cease to exist.In fact,many firms can actually benefit from financial distress by:

Accepted Answer

A) re-evaluating their core operations and restructuring their assets. 
B) selectively ceasing payment on some of their outstanding debts. 
C) filing for Chapter 7 bankruptcy. 
D) liquidating. 
E) increasing their debt load. 
A) re-evaluating their core operations and restructuring their assets. 
B) selectively ceasing payment on some of their outstanding debts. 
C) filing for Chapter 7 bankruptcy. 
D) liquidating. 
E) increasing their debt load.

Question 19

In a prepackaged bankruptcy the firm:

Accepted Answer

A) reaches an agreement with its creditors prior to filing the bankruptcy petition. 
B) exchanges all debt securities with equity securities. 
C) pays all its secured creditors and exchanges the unsecured debt securities with equity. 
D) must agree with the bankruptcy plan submitted to it by its creditors. 
E) prearranges an auction that will liquidate the firm within one month of the legal filing. 
A) reaches an agreement with its creditors prior to filing the bankruptcy petition. 
B) exchanges all debt securities with equity securities. 
C) pays all its secured creditors and exchanges the unsecured debt securities with equity. 
D) must agree with the bankruptcy plan submitted to it by its creditors. 
E) prearranges an auction that will liquidate the firm within one month of the legal filing.

Question 20

Two primary methods of a financial restructuring are:

Accepted Answer

A) a private workout and a Chapter 7 bankruptcy. 
B) a Chapter 7 and a Chapter 11 bankruptcy. 
C) replacing debt with equity and a private workout. 
D) a private workout and a Chapter 11 bankruptcy. 
E) a stock repurchase and a Chapter 11 bankruptcy. 
A) a private workout and a Chapter 7 bankruptcy. 
B) a Chapter 7 and a Chapter 11 bankruptcy. 
C) replacing debt with equity and a private workout. 
D) a private workout and a Chapter 11 bankruptcy. 
E) a stock repurchase and a Chapter 11 bankruptcy.

Exam 30: Financial Distress

Why would a firm's creditors voluntarily agree to a prepackaged reorganization that offers those creditors less than they are owed?

A Chapter 7 bankruptcy involves all the following except:

A firm in financial distress that reorganizes through the bankruptcy process:

Insolvency can be defined as:

Section 363 as it relates to a bankruptcy filing:

A firm is most likely experiencing financial distress when:

Flow-based insolvency is defined as:

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

A corporation is adjudged bankrupt under Chapter 7.Based on APR,shareholders receive payment,if funds are remaining,after the:

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

Periods of financial distress are most associated with:

Most firms in financial distress do not fail or cease to exist.In fact,many firms can actually benefit from financial distress by:

In a prepackaged bankruptcy the firm:

Two primary methods of a financial restructuring are:

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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