Deck 16: Financially Troubled Ventures: Turnaround Opportunities

Question 1

Increasing revenues relative to current costs is the same thing as cutting costs relative to current revenues.

Answer 1

False

Question 2

"Cash flow insolvency" exists when a venture's cash flow is insufficient to meet its current contractual debt obligations.

Answer 2

True

Question 3

Asset restructuring involves improving the working capital to sales relationships and/or selling off fixed assets.

Answer 3

True

Question 4

Operations restructuring always involves growing a venture's revenues relative to its costs.

Question 5

"Balance sheet insolvency" exists when a venture's total assets exceeds its total debt.

Question 6

Chapter 7 bankruptcy filing permits for the attempt to reorganize.

Question 7

Ventures that reorganize under Chapter 11 bankruptcies may still be liquidated via Chapter 7 bankruptcies.

Question 8

Chapter 11 bankruptcy filing requires liquidation of the venture.

Question 9

"Balance sheet insolvency" exists when a venture has negative book equity or net worth.

Question 10

"Asset restructuring" involves improving the working-capital-to-sales relationship and/or selling off fixed assets.

Question 11

The transfer of title to the venture's assets to a third-party trustee is called assignment.

Question 12

"Cash flow insolvency" occurs when a venture's cash flows are insufficient to meet the venture's current contractual equity obligations.

Question 13

Balance sheet insolvency exists when a venture has negative net debt.

Question 14

A private workout is a voluntary agreement between a venture's owners and its shareholders that provides for a financial restructuring of the venture's outstanding debt.

Question 15

Operations restructuring involves growing revenues relative to costs and/or cutting costs relative to the ventures revenues.

Question 16

During the development, startup, and survival stages of a venture's life cycle, the relevant financing and operating decisions faced are either restructuring or liquidating.

Question 17

When a venture's cash flow is insufficient to meet its current contractual debt obligations asset flow insolvency exists.

Question 18

Nearly one-fourth of all businesses dissolve within two years of beginning operations, and over one-half of new ventures dissolve within four years.

Question 19

Foreclosure occurs when cash flows are insufficient to meet current debt obligations.

Question 20

During the rapid growth stage of a venture's life cycle, the relevant financing and operating decisions encountered are to go public, or to sell or merge the firm.

Question 21

Which of the following refers to the failure to meet loan interest or principal payments when due?

A) insolvency
B) loan default
C) acceleration provision
D) cross default provision
E) foreclosure

Question 22

A "cross default provision" and an "acceleration provision" both cause principal obligations on a loan to become immediately due.

Question 23

During the survival stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A) monitoring financial performance
B) obtaining seasoned financing
C) projecting cash needs
D) obtaining first round financing

Question 24

A "cross default provision" provides that defaulting on one loan makes the venture liquidate all other loans.

Question 25

An "acceleration provision" provides that all future interest and principal obligations on a loan become immediately due when default occurs.

Question 26

Financial distress occurs when cash flow is insufficient to meet current debt obligations

Question 27

A voluntary bankruptcy petition if filed by the venture's management.

Question 28

An involuntary bankruptcy petition is filed by the venture's management.

Question 29

A venture in financial distress tries to reorganize under Chapter7 of the U.S. Bankruptcy Code.

Question 30

When a venture's cash on hand is insufficient to pay currently due liabilities, this is referred to as:

A) financial distress
B) balance sheet insolvency
C) bankruptcy
D) liquidation

Question 31

During the development stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A) screening business ideas
B) preparing the business plan
C) obtaining seed financing
D) managing the ongoing operations

Question 32

Debt composition change occurs when creditors reduce their contractual claims against the venture.

Question 33

The two basic options available to resolve a venture in financial distress are restructure or liquidate.

Question 34

The common pool problem exists because individual creditors have the incentive to foreclosure on the venture even though it is worth more as a going concern.

Question 35

During the startup stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A) creating and building value
B) choosing organizational form
C) preparing initial financial statements
D) obtaining startup financing

Question 36

When one or more creditors refuse to agree to the reorganization terms of a venture in the hopes of making a larger individual recovery, it is said that a "holdout problem" has arisen.

Question 37

Foreclosure is the legal process used by creditors to try to collect amounts owed on loans in default

Question 38

Balance sheet insolvency occurs when a venture has:

A) negative net worth
B) total liabilities greater than total assets
C) negative retained earnings but positive net worth
D) a and b above
E) a, b, and c above

Question 39

"Foreclosure" is a legal process used by entrepreneurs to avoid diluting their ownership positions.

Question 40

Debt payments extension involves postponing due dates for interest and principal payments.

Question 41

Which of the following provides that defaulting on one loan places all loans in default?

A) insolvency
B) loan default
C) acceleration provision
D) cross default provision
E) foreclosure

Question 42

Which of the following provides that all future interest and principal obligations on a loan become immediately due when default occurs?

A) insolvency
B) loan default
C) acceleration provision
D) cross default provision
E) foreclosure

Question 43

When a venture is in financial distress but believes it has a turnaround opportunity, which of the following won't apply?

A) operations restructuring
B) asset restructuring
C) private liquidation
D) financial restructuring

Question 44

Which of the following refers to when a bankruptcy court accepts a reorganization plan for all creditors including dissenting creditor classes?

A) automatic stay provision
B) holdout problem
C) cram down procedure
D) net worth requirements

Question 45

The legal process that facilitates a creditor's ability to collect on loans in default is known as:

A) the acceleration provision
B) the holdout provision
C) foreclosure
D) a private workout

Question 46

The ways, individually or in combination, for resolving financial distress are:

A) operations restructuring
B) financial restructuring
C) asset restructuring
D) all of the above
E) none of the above

Question 47

Your firm had net sales of $80,000 this past year and receivables of $20,000; and a cost of goods sold of $522,000. What were the days sales outstanding?

A) 91 days
B) 48 days
C) 36 days
D) 5 days
E) 4 days

Question 48

A venture may file for legal bankruptcy in order to attempt to reorganize under which one of the following chapters?

A) Chapter 1
B) Chapter 5
C) Chapter 7
D) Chapter 11
E) Chapter 13

Question 49

Which of the following refers to changing the contractual terms of the existing debt obligations?

A) debt payment extensions
B) asset restructuring
C) financial restructuring
D) debt composition change

Question 50

Your firm has an average collection period of 36.5 days. Sales revenues are $30,000. What is your firm's average investment in accounts receivables?

A) $3,650
B) $3,000
C) $1,000
D) $ 822
E) $ 444

Question 51

When individual creditors have an incentive to foreclose on a venture, even though it is worth more as a going concern, it is said that there is a:

A) common pool problem
B) holdout problem
C) solvency problem
D) cram-down problem

Question 52

A venture may file for legal bankruptcy in order to liquidate the venture under which one of the following chapters?

A) Chapter 1
B) Chapter 5
C) Chapter 7
D) Chapter 11

Question 53

Which of the following refers to postponing due dates for interest and principal on loans and payments on credit purchases?

A) debt payment extensions
B) asset restructuring
C) financial restructuring
D) debt composition change

Question 54

Which of the following restricts the ability of individual creditors to foreclosure to try to recover their individual claims?

A) automatic stay provision
B) holdout problem
C) cram down procedure
D) net worth requirements

Question 55

Which of the following refers to when creditors reduce their contractual claims against the venture?

A) debt payment extensions
B) asset restructuring
C) financial restructuring
D) debt composition change

Question 56

When a venture has a negative equity or net worth position and/or when its cash flow is insufficient to meet current debt obligations refers to which of the following?

A) insolvency
B) loan default
C) acceleration provision
D) cross default provision
E) foreclosure

Question 57

Your firm has inventory of $188,000, cost of goods sold of $522,000, and accounts receivable of $214,000. What is your inventory conversion period?

A) 131 days
B) 152 days
C) 168 days
D) 98 days
E) 76 days

Question 58

When a venture files for legal bankruptcy through Chapter 11 and attempts to reorganize, which is not likely to be a possible outcome?

A) Chapter 7 liquidation
B) merge the venue
C) restructuring of assets
D) reorganize and continue to operate

Question 59

Which of the following refers to the legal process used by creditors to try to collect amounts owed on loans in default?

A) insolvency
B) loan default
C) acceleration provision
D) cross default provision
E) foreclosure

Question 60

The rule governing hierarchical order in which claim payments must be made during a bankruptcy is known as the:

A) cram-down procedure
B) absolute priority rule
C) prepackaged bankruptcy rule
D) involuntary bankruptcy rule