Question 1

Empirical evidence indicates that the majority of distressed public firms that do not remain public:&#10;A)file for Chapter 11 bankruptcy (reorganization).&#10;B)file for Chapter 7 bankruptcy (liquidation).&#10;C)are acquired.&#10;D)undergo a going-private transaction (i.e., a buyout).

Accepted Answer

The majority of distressed public firms that do not remain public are typically acquired by other companies. This is often seen as a strategic move by acquiring firms to expand their business operations or enter new markets by taking over the assets of the distressed company.

Question 2

In Chapter 11 proceedings, the court almost always strictly adheres to the Absolute Priority Rule (APR).

Accepted Answer

In practice, the Absolute Priority Rule (APR) in Chapter 11 bankruptcy proceedings is not always strictly adhered to due to negotiations and reorganization plans that may involve deviations agreed upon by creditors and debtors, aiming for a feasible restructuring of the debtor's obligations.

Question 3

Among publicly traded U.S.nonfinancial firms, most bankruptcy announcements are complete surprises to the market, as indicated by the fact that, for over 90% of such firms, their announcement-month market equity value (MEQ) is at least as high as their MEQ at month -12 relative to the announcement.

Accepted Answer

Market participants often anticipate financial distress or bankruptcy well before the official announcement, as evidenced by declining market equity values (MEQ) and other financial indicators. The statement that over 90% of firms have an announcement-month MEQ at least as high as their MEQ at month -12 is not supported by empirical evidence, which shows that firms typically experience a decline in their stock prices leading up to a bankruptcy announcement.

Question 4

Investors who specialize in the debt or equity of distressed firms are called:&#10;A)speculators.&#10;B)arbitrageurs.&#10;C)bottom dwellers.&#10;D)vulture investors.

Accepted Answer

Vulture investors specialize in buying securities of distressed firms, hoping to profit from the eventual recovery of the company's financial health. They often invest in debt or equity that is considered to be undervalued due to the firm's financial difficulties.

Question 5

In a______, the claimants have already worked out the terms of the reorganization, and basically file just to make the agreement official.&#10;A)perfunctory filing&#10;B)token filing&#10;C)prepackaged bankruptcy&#10;D)gesture filing

Accepted Answer

In a prepackaged bankruptcy, the claimants have negotiated and agreed upon the terms of the reorganization before filing for bankruptcy, making the process quicker and more efficient as the court just needs to approve the already agreed-upon plan.

Question 6

According to signaling theory, Chapter 11 is a useful mechanism for screening inefficient firms out of debt renegotiation.Inefficient firms voluntarily choose Chapter 11 because:&#10;A)the firm can be liquidated more quickly.&#10;B)negotiations therein generally result in some value retained by shareholders.&#10;C)creditors are protected from violations of the absolute priority rule (APR).&#10;D)management can better signal a higher firm value within Chapter 11.

Accepted Answer

Inefficient firms may choose Chapter 11 because negotiations often allow for some value to be retained by shareholders, which can be more favorable than liquidation.

Question 7

In complete voluntary liquidations, the sum of the firm's parts is worth more than the whole, for all of the following reasons EXCEPT:&#10;A)the assets (or divisions) may be worth more in the hands of more competent managers.&#10;B)liquidated assets always sell at a premium to their fair value.&#10;C)the special tax treatment afforded liquidations provides a source of value over and above the firm's value as a going concern.&#10;D)any diseconomies associated with excessive diversification can be eliminated by piecemeal sale through liquidation.

Accepted Answer

Liquidated assets do not always sell at a premium to their fair value. In many cases, assets may be sold at a discount, especially in a forced or rushed liquidation scenario. The other options (A, C, D) are valid reasons why the sum of a firm's parts might be worth more than the whole in a voluntary liquidation.

Question 8

In Chapter 11, the court has two mechanisms to implement an optimal bankruptcy outcome:&#10;A)the right to extinguish any claim, and the use of a restricted auction.&#10;B)the right to extinguish any claim, and restrictions on bargaining between claimants.&#10;C)restrictions on bargaining between claimants, and the threat of fines.&#10;D)restrictions on bargaining between claimants, and the use of a restricted auction.

Accepted Answer

In Chapter 11 bankruptcy proceedings, the court can ensure an optimal outcome through two main mechanisms: imposing restrictions on bargaining between claimants to prevent any unfair advantage or collusion, and the use of a restricted auction to ensure the assets of the bankrupt entity are sold at the best possible price under controlled conditions.

Question 9

According to empirical studies, the combination of secured private debt and numerous public debt issues (in a distressed firm's capital structure) impedes out-of-court debt restructuring and increases the probability of a Chapter 11 filing.

Accepted Answer

Empirical studies suggest that a complex capital structure, including both secured private debt and multiple public debt issues, can make out-of-court debt restructuring more difficult. This complexity often leads to coordination problems among different classes of creditors, increasing the likelihood of resorting to a Chapter 11 bankruptcy filing to reorganize the firm's debts under court supervision.

Question 10

In debt restructuring, all debt claimants must agree on the reassignment of debt claims, but one or more claimants has an incentive to wait for a better deal.This is known as the ___problem.&#10;A)holdout&#10;B)instigation&#10;C)concession&#10;D)compromise

Accepted Answer

The holdout problem occurs when one or more creditors refuse to agree to a debt restructuring deal in hopes of getting a better deal than what is offered to the others, causing delays or complications in the process.

Question 11

To preserve the value of a distressed firm, it is generally important for the firm to continue operating throughout Chapter 11 proceedings.Generally, the firm's current management is allowed to run the firm during the proceedings under a restrictive arrangement called

A)the value-preservation dictum.
B)debtor-in-possession.
C)managerial discretion.
D)trustee assignment.

Accepted Answer

The answer of To preserve the value of a distressed...

Question 12

For distressed firms with both bank and public debt outstanding, banks never make concessions unless public debtholders also restructure their claims.

Accepted Answer

The answer of For distressed firms with both bank and...

Question 13

According to the Absolute Priority Rule (APR), the correct descending order of claim priority is:&#10;A)administrative claims; statutory priority claims; secured creditors' claims; unsecured creditors' claims; equity claims.&#10;B)equity claims; administrative claims; statutory priority claims; secured creditors' claims; unsecured creditors' claims.&#10;C)statutory priority claims; administrative claims; secured creditors' claims; unsecured creditors' claims; equity claims.&#10;D)administrative claims; statutory priority claims; unsecured creditors' claims; secured creditors' claims; equity claims.

Accepted Answer

The answer of According to the Absolute Priority Rule (APR),...

Deck 18: Debt Restructuring, Being Acquired, Bankruptcy, Reorganization, and Liquidation