Deck 13: Corporate Failure

Question 1

In the Altman's Z-score one financial accounting measure appears in 4 of the 5 ratios used, what is it?

A) Sales Revenue
B) Operating Cash Flow
C) Total Assets
D) Number of Independent Directors

Answer 1

C

Question 2

It has been noted that remuneration packages for CEOs in failed companies:

A) Tend to include more options
B) Have a substantially lower proportion of 'at risk' components
C) Are generally much higher
D) Are generally much lower

Answer 2

B

Question 3

The corporate collapse in Australia that happened in the 1980's were thought to be a result of:

A) Poor corporate governance
B) Inadequate accounting disclosures
C) Economic downturn
D) Audit failures

Answer 3

B

Question 4

Which of the following mechanisms transferred the financial crisis from the US to the rest of the world?

A) Exposure of the world's financial system to sub-prime debt
B) Decline in US demand for imports
C) Contagion of concerns about the housing market in other countries
D) All of the above

Question 5

A bubble in which class of assets has generally been claimed as the trigger for the global financial crisis?

A) Shares
B) Precious metals
C) Consumables
D) Housing

Question 6

A common factor identified as an issue in both the HIH and Enron collapses was:

A) Deficiencies in the audit process
B) Over reliance on complex financial instruments
C) Lack of board independence
D) None of the above

Question 7

Though there are many potential causes of corporate failure what has been suggested as the common underlying problem?

A) Changes in technology
B) Economic recession
C) Management inadequacies
D) Changes in import protections

Question 8

Which of the following is NOT an indirect cost of corporate failure?

A) Loss of corporate reputation
B) Loss of key employees
C) Additional interest on debt that cannot be paid off
D) None of the above, i.e. they are all indirect costs of corporate failure

Question 9

Which of the following statements is most correct when it comes to predicting corporate distress:

A) The Altman Z-Score has been shown to be 90% accurate
B) There are many models in use
C) To date there has been no success in predicting corporate failure
D) The majority of inputs in the majority of corporate distress models are qualitative

Question 10

Which of the following has ASIC identified as a practice that indicates risk of corporate insolvency?

A) Disorganised internal accounting procedures
B) Judgement debts
C) Loss of key management personnel
D) All of the above

Question 11

Companies in Australia may only enter voluntary administration under what circumstances?

A) Their creditors agree in a non-binding vote
B) They are able to pay all their debts in full
C) The court orders it
D) At least 75% of the shareholders agree to it

Question 12

Poor figures in which financial statement is usually the trigger of corporate failure?

A) Statement of Comprehensive Income - Falling revenues
B) Statement of Financial Position - Increasing liabilities
C) Statement of Cash Flows - Poor operating cash flows
D) Statement of Changes in Equity - Increasing retained losses

Question 13

Following a number of corporate failures in 2001 legislative changes in Australia:

A) Prohibited audit firms from providing other services to clients
B) Required the rotation of audit firms every 5 years
C) Required disclosure of the nature and value of non-audit services provided by auditors to be disclosed
D) Forced the Australian government to enact the Sarbanes-Oxley Act

Question 14

One test of Altman's Z-score in Australia found that its success at predicting financial distress was:

A) Useless, being no better than guessing
B) Below Altman's original study
C) Above Altman's original study
D) Excellent, almost perfect at predicting 1 year before failure

Question 15

The definition of corporate failure is:

A) When a company becomes bankrupt or insolvent
B) The appointment of a receiver or administrator
C) Unclear and ill-defined
D) When a company delists and liquidates

Question 16

Which of the following has ASIC NOT identified as a practice that indicates risk of corporate insolvency?

A) Absence of corporate plans
B) Entering into instalment arrangements to pay debts
C) Decreased monitoring by financier
D) None of the above, i.e. they have all been identified by ASIC

Question 17

Corporate governance has been suggested to be at the heart of corporate failure. It has been suggested that companies are less likely to get in financial trouble if their boards:

A) Let management run the company with minimal oversight
B) Are active in their roles
C) Also manage the company
D) Have good political connections

Question 18

Which of the following has been identified as a major cause of corporate failure?

A) Overexpansion
B) Dominant CEO
C) Failure of internal controls
D) All of the above

Question 19

Business Week considers which of the following to be good governance when rating boards?

A) Directors should do business with the company
B) Directors should own shares in the company
C) Directors should always meet with management present
D) None of the above

Question 20

Research indicates that lenders making predictions of corporate failure relied:

A) Almost exclusively on accrual information
B) More on accrual information than cash flow information
C) More on cash flow information than accrual information
D) Almost exclusively on cash flow information