Deck 22: Bankruptcy and Financial Distress

Question 1

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case I?

A) $125,678
B) $0
C) $357,250
D) $475,000

Answer 1

$0

Question 2

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case III?

A) $675,000
B) $0
C) $525,000
D) $175,000

Answer 2

$675,000

Question 3

Exhibit 23-1

If the company has $4,268,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case II occurs?

A) 100%
B) 33.83%
C) 66.17%
D) 46.23%

Answer 3

66.17%

Question 4

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case III occurs?

A) 129.03%
B) 100%
C) 82.56%
D) 17.44%

Question 5

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case I occurs?

A) 100.00%
B) 70.59%
C) 29.41%
D) 82.57%

Question 6

Exhibit 23-1

If the company has $5,245,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the subordinated debentures in Case II?

A) $420,300
B) $1,829,700
C) $2,250,000
D) $1,256,200

Question 7

A creditor that has a specific asset pledged as collateral are called

A) secured creditors
B) unsecured creditors
C) general creditors
D) shareholders

Question 8

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the subordinated debentures in Case III?

A) $1,250,000
B) $958,250
C) $745,400
D) $1,075,268

Question 9

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case II occurs?

A) 70.59%
B) 53.49%
C) 100%
D) 46.51%

Question 10

Exhibit 23-1

If the company has $578,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case III occurs?

A) 24.86%
B) 75.14%
C) 100%
D) 56.35%

Question 11

A company that does not pay its debts when they come due is called

A) insolvent
B) debtor in possession
C) broke
D) financially distressed

Question 12

Exhibit 23-1

If the company has $2,534,000 in funds to distribute to unsecured creditors,what percentage of their claims are going to be satisfied if Case I occurs?

A) 26.32%
B) 40.38%
C) 100%
D) 59.62%

Question 13

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the notes payable in Case I?

A) $1,764,706
B) $2,500,000
C) $735,250
D) $1,326,690

Question 14

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the subordinated debentures in Case I?

A) $1,050,534
B) $1,250,000
C) $367,647
D) $882,353

Question 15

Exhibit 23-1

If the company has $2,456,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the notes payable in Case I?

A) $1,444,706
B) $2,500,000
C) $1,055,294
D) $1,863,685

Question 16

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the accounts payables in Case II?

A) $162,791
B) $187,209
C) $350,000
D) $235,310

Question 17

Exhibit 23-1

If the company has $3,000,000 in funds to distribute to unsecured creditors,what is the settlement that is received by the holders of the subordinated debentures in Case II?

A) $2,250,000
B) $1,203,525
C) $$1,046512
D) $1,538,957

Question 18

The case of business failure in which a firm's liabilities exceed the fair market value of its assets is called

A) economic failure
B) technical insolvency
C) insolvency bankruptcy
D) business failure

Question 19

The section of the Bankruptcy Reform Act of 1978 that outlines the procedures for reorganizing a failed or failing firm is

A) chapter 7
B) chapter 11
C) chapter 13
D) none of the above

Question 20

The alteration of a company's capital structure to reduce high fixed charges is called

A) recapitalization
B) cramdown procedure
C) involuntary reorganization
D) absolute priority rule

Question 21

Polaroid's bankruptcy filing is an example of a failure due to

A) business cycle downturn
B) corporate maturity
C) poor financial actions
D) illiquidity

Question 22

Bavarian Sausages has a working capital/total assets ratio of 0.3,a retained earnings/total assets ratio of 0.4,an earnings before interest and taxes/total assets ratio of 0.24,a market value of equity/book value of equity ratio of 0.4,and a sales/total assets ratio of 0.55.What is the company's Z score?

A) 2.50
B) 1.75
C) 3.25
D) 2.85

Question 23

Needsalift, Inc. APRs
Needsalift, Inc. has $10 million in funds to distribute to its unsecured creditors. Two sets of possible claims are presented below.

For Case II,what settlement will the accounts payable holders receive?

A) $3 million
B) $3.34 million
C) $4.65 million
D) $6 million

Question 24

Which factor in the Z-score model will most affect the likelihood of bankruptcy predicted?

A) working capital to total assets ratio
B) EBIT to total assets ratio
C) market value of equity to book value of equity ratio
D) retained earnings to total assets ratio

Question 25

A firm has outstanding debt of $100 million.Suppose it voluntarily agrees to pay a group of creditors 40 cents on the dollar immediately and to pay the remaining creditors 60 cents on the dollar in four periodic installments.This is

A) an extension.
B) a composition.
C) a combination of an extension and a composition.
D) a cram-down.

Question 26

The debtor in possession (DIP)is

A) the lenders who are owed money by the bankrupt firm.
B) the trustee of the bankrupt firm.
C) the bankrupt (filing) firm.
D) none of the above.

Question 27

Bavarian Sausages has a working capital/total assets ratio of 0.8,a retained earnings/total assets ratio of 0.2,an earnings before interest and taxes/total assets ratio of 0.34,a market value of equity/book value of equity ratio of 1.2,and a sales/total assets ratio of 0.75.What is the company's Z score?

A) 3.25
B) 2.78
C) 1.65
D) 3.83

Question 28

If absolute priority rules are enforced in a Chapter 7 bankruptcy,which of the following is least likely to receive payment?

A) local, state, or federal governments owed taxes
B) owners of common stock
C) owners of bonds
D) banks holding loans secured by collateral

Question 29

Bavarian Sausages has a working capital/total assets ratio of 0.1,a retained earnings/total assets ratio of 0.2,an earnings before interest and taxes/total assets ratio of 0.14,a market value of equity/book value of equity ratio of 0.2,and a sales/total assets ratio of 0.35.What is the company's Z score?

A) 0.86
B) 1.96
C) 1.33
D) 2.13

Question 30

Exhibit 23-1

If the company has $2,475,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case III?

A) $75,000
B) $0
C) $150,000
D) $225,000

Question 31

A firm has outstanding debt of $100 million.Suppose it voluntarily agrees to pay all creditors 40 cents on the dollar.This is

A) an extension.
B) a composition.
C) a combination of the two in (a) and (b).
D) a cram-down.

Question 32

A firm that is subject to Chapter 7 of the Bankruptcy Reform Act is one that

A) is in involuntary reorganization.
B) is facing a cram-down procedure.
C) is to be liquidated.
D) is seeking a recapitalization.

Question 33

Needsalift, Inc. APRs
Needsalift, Inc. has $10 million in funds to distribute to its unsecured creditors. Two sets of possible claims are presented below.

For Case I,how much will the bank receive for its notes payable claim?

A) $3.75 million
B) $4.29 million
C) $6.00 million
D) nothing.

Question 34

If a company's financial position is characterized by current liabilities greater than current assets,it is

A) bankrupt.
B) illiquid.
C) insolvent.
D) liquidated.

Question 35

Needsalift, Inc. APRs
Needsalift, Inc. has $10 million in funds to distribute to its unsecured creditors. Two sets of possible claims are presented below.

For Case II,what settlement will the unsecured bondholders receive?

A) $4 million
B) $3.25 million
C) $2.22 million
D) Nothing

Question 36

In order to move forward in a financial crisis without many of the costs of legal bankruptcy,a firm may seek

A) a consent procedure.
B) a cram-down procedure.
C) a chapter 11 reorganization.
D) a voluntary settlement.

Question 37

If absolute priority rules are enforced in a Chapter 7 bankruptcy,which of the following is most likely to receive payment?

A) local, state, and federal governments owed taxes.
B) owners of common stock
C) owners of bonds
D) banks holding loans secured by collateral

Question 38

Needsalift, Inc. APRs
Needsalift, Inc. has $10 million in funds to distribute to its unsecured creditors. Two sets of possible claims are presented below.

For Case I,what settlement will the unsecured bondholders receive?

A) Nothing
B) $2 million
C) $1.43 million
D) $1 million

Question 39

Exhibit 23-1

If the company has $4,152,000 in funds to distribute to unsecured creditors,how much do the owners of the firm receive in Case I?

A) $0
B) $98,000
C) $128,000
D) $253,000

Question 40

Smart Products has a working capital to total assets ratio of 0.15,a retained earnings to total assets ratio of 0.2,an EBIT to total assets ratio of 0.4,a market value of equity to book value of equity ratio of 1.3,and a sales to total assets ratio of 0.75.What is Smart Products' Z-score?

A) 2.60
B) 3.31
C) 5.74
D) 2.79

Question 41

Gizmo Co.has a Z-score based on its most recent financial information of 3.0.Based on this,

A) Gizmo has a high probability of failure.
B) Gizmo has a low probability of failure.
C) Gizmo's probability of failure is uncertain.
D) None of these, since the Z-score does not predict firm failure.

Question 42

The legal mechanism by which inefficient firms may leave the market is

A) economic darwinism.
B) bankruptcy.
C) liquidation.
D) none of the above.

Question 43

Gizmo Co.has the following financial measures: working capital to total assets ratio of 0.05,retained earnings to total assets ratio of 0.10,EBIT to total assets ratio of 0.3,market value of equity to book value of equity ratio of 1.1,and sales to total assets ratio of 0.4.What is Gizmo's Z-score?

A) 2.40
B) 2.35
C) 2.30
D) 2.25

Question 44

Winding up a firm's operations,selling off its assets,and distributing the proceeds to creditors is called

A) reorganization.
B) liquidation.
C) dissolution.
D) none of the above.

Question 45

Gizmo Co.has a Z-score based on its most recent financial information of 2.3.Based on this,

A) Gizmo has a high probability of failure.
B) Gizmo has a low probability of failure.
C) Gizmo's probability of failure is uncertain.
D) None of these, since the Z-score does not predict firm failure.

Question 46

Which of the following is not an example of mismanagement?

A) oil price increases
B) overexpansion
C) ineffective sales force
D) poor financial actions

Question 47

A voluntary reorganization of debts whereby a firm's debt obligations are reorganized according to a creditors pro-rata share of the debting firm's total debt,is called

A) a composition.
B) an extension.
C) creditor control.
D) none of the above.

Question 48

Economic failure occurs when

A) a firm fails to earn a return that is greater than its cost of debt.
B) a firm fails to earn a return that is greater than its cost of equity capital.
C) a firm fails to earn a return that is greater than its cost of capital.
D) both a and c

Question 49

Suppose a firm has a Z score of 1.6,and the following financial characteristics: working capital to total assets ratio of 0.05,retained earnings to total assets ratio of 0.10,market value of equity to book value of equity ratio of 1.1,and sales to total assets ratio of 0.4.What must be its EBIT to total assets ratio?

A) 0.15
B) 0.10
C) 0.05
D) 0.0

Question 50

A voluntary reorganization of debts whereby a firm's debt obligations are still expected to be paid in full but at a later than originally scheduled date,is called

A) a composition.
B) an extension.
C) creditor control.
D) none of the above.

Question 51

When a firm's liabilities exceed the fair market value of its assets the firm

A) is insolvency bankrupt.
B) is in default.
C) is in a liquidity crisis.
D) none of the above.

Question 52

Suppose a firm's creditors decide that replacing current management is a requirement in a voluntary reorganization.This is called

A) an extension reorganization.
B) a composition reorganization.
C) a creditor control reorganization.
D) a cram-down reorganization.

Question 53

Gizmo Co.has a Z-score based on its most recent financial information of 1.2.Based on this,

A) Gizmo has a high probability of failure.
B) Gizmo has a low probability of failure.
C) Gizmo's probability of failure is uncertain.
D) None of these, since the Z-score does not predict firm failure.

Question 54

In a Chapter 11 setting,a firm

A) must be liquidated.
B) can be reorganized, but only if all creditors unanimously agree to the plan.
C) may have the terms of its debt relaxed.
D) none of the above.

Question 55

If an auto maker were to fail in an economic downturn then it would fail due to

A) economic activity.
B) corporate maturity.
C) an overly conservative capital structure.
D) none of the above.

Question 56

A modern day buggy whip maker that went out of business because of low sales really failed because of

A) its corporate maturity.
B) its inability to control the business cycle.
C) an aggressive capital structure.
D) none of the above.

Question 57

A firm has outstanding debt of $100 million.Suppose it voluntarily agrees to pay all creditors in full in six periodic installments.This is

A) an extension.
B) a composition.
C) a combination of the two in (a) and (b).
D) a cram-down.

Question 58

If a firm is technically insolvent then the firm may arrange

A) a workout.
B) a voluntary settlement.
C) both (a) and (b)
D) none of the above

Question 59

Financial distress

A) always leads to bankruptcy.
B) imposes direct and indirect costs on the firm.
C) has no effect on the firm's customers.
D) all of the above.

Question 60

A reorganization of debts whereby the creditor committee decides that replacing the operating management is the only feasible way to maintain the firm,is called

A) a composition.
B) an extension.
C) creditor control.
D) none of the above.

Question 61

Which party is given the responsibility of liquidating a firm if it is necessary to do so?

A) the bankruptcy judge
B) the creditors of the firm
C) the bankruptcy trustee
D) the creditors committee

Question 62

Which of the following is (are)legally mandated subsidies to corporations in bankruptcy?

A) the ability to reject collective bargaining agreements
B) the right to cease the obligation to pay interest to prebankruptcy creditors
C) the right to terminate underfunded pension plans
D) all of the above

Question 63

If an outside party files a bankruptcy petition on a firm that owes the outside party a debt,then that is called

A) a voluntary reorganization.
B) an involuntary reorganization.
C) a liquidation.
D) none of the above

Question 64

Bank A has debt that is backed with secured assets of Company B,who is currently liquidating its assets in bankruptcy.If Bank A is owed $10,000,000 and the liquidation of the assets will provide $8,000,000,then what happens to the remaining $2,000,000?

A) the $2,000,000 will be lost in the bankruptcy process
B) the $2,000,000 will have to be repaid through the automatic securitization of other assets
C) the $2,000,000 will become an unsecured or general credit amount in the liquidation process.
D) none of the above.

Question 65

Within Altman's Z score model of predicting bankruptcy,working capital is included in the model.If working capital increases what affect does that have on the probability of the firm being in bankruptcy?

A) increases
B) remains the same
C) decreases
D) it is impossible to determine

Question 66

Liquidation is seen as a means

A) of providing breathing space to viable firms that are in temporary financial distress.
B) of winding up the operations of firms that are not economically viable.
C) of punishing management of firms that have defrauded shareholders.
D) all of the above

Question 67

Which of the following terms describes when a firm is unable to pay its liabilities as they come due because assets cannot be converted into cash within a reasonable period of time?

A) bankruptcy
B) insolvency bankruptcy
C) liquidity crisis
D) economic failure
E) technical insolvency

Question 68

Which party is responsible for filing a reorganization plan to the court in a case of bankruptcy?

A) the shareholders
B) the debtholders
C) the debtor in possession
D) all of the above

Question 69

Which of the following claims is first to be paid in a Chapter 7 liquidation?

A) secured creditors
B) the federal government for taxes due
C) the expenses incurred by those administering the bankruptcy process
D) none of the above

Question 70

What is the term that describes an arrangement a firm can make with its creditors that enables it to bypass many of the costs involved in legal bankruptcy proceedings if it becomes technically insolvent?

A) voluntary reorganization
B) composition
C) liquidation
D) workout
E) none of the above

Question 71

A cramdown procedure is used when

A) a reorganization plan fails to meet the standard for approval by all classes under the unanimous consent procedure.
B) the firm is clearly insolvent and the existing equity has no value.
C) either a or b
D) none of the above

Question 72

Which of the following terms describes when a firm's liabilities exceed the fair market value of its assets?

A) bankruptcy
B) insolvency bankruptcy
C) liquidity crisis
D) economic failure
E) technical insolvency

Question 73

When a firm files to either reorganize or liquidate in bankruptcy all creditors of the firm

A) are prevented from filing or continuing with lawsuits against the firm.
B) all creditors of the firm are guaranteed to receive less than their original claim.
C) automatically become shareholders of the firm.
D) none of the above.

Question 74

What is the term that describes an agreement of the creditors by which they pass the power to liquidate the firm's assets to an adjustment bureau,a trade association,or a third party?

A) trustee
B) assignment
C) absolute priority
D) extension
E) composition

Question 75

Within Altman's Z score model of predicting bankruptcy,the total value of the assets are included in the model.If the total value of the assets decreases what effect does that have on the probability of the firm being in bankruptcy?

A) increases
B) remains the same
C) decreases
D) it is impossible to determine since the value of the assets is only used as a parameter in the model

Question 76

The procedures for liquidating a corporation reside

A) in Chapter 7 of the Bankruptcy Reform Act of 1978.
B) in Chapter 11 of the Bankruptcy Reform Act of 1978.
C) Common Law.
D) none of the above.

Question 77

Within the bankruptcy process when debts are exchanged for equity or the maturity of existing debts are extended,this is called

A) a recapitalization.
B) a reprioritization.
C) a refinancing.
D) none of the above

Question 78

Which of the following situations allow for a reorganization type bankruptcy filing?

A) a commercial bank that was caught in a cyclical downturn
B) a firm that sells high end pork bellies but finds little market for its product
C) an auto maker that became over-leveraged before an unexpected economic downturn
D) both a and c

Question 79

The procedures for reorganizing a failed or failing corporation reside

A) in Chapter 7 of the Bankruptcy Reform Act of 1978.
B) in Chapter 11 of the Bankruptcy Reform Act of 1978.
C) Common Law.
D) none of the above.

Question 80

The term that describes winding up a firm's operations,selling off its assets,and distributing the proceeds to creditors is

A) voluntary reorganization.
B) composition.
C) liquidation.
D) workout.
E) none of the above