Question 1

Sales within the protection of Chapter 11 reorganization may be accomplished either by a negotiated private sale to a particular purchaser or through a public auction.

Accepted Answer

Sales within Chapter 11 reorganization can be achieved through either a private sale negotiation or a public auction.

Question 2

All of the following are true of the bankruptcy process except for
A) The debtor firm may seek protection from its creditors by initiating bankruptcy or may be forced into bankruptcy by its creditors.
B) When creditors file for bankruptcy on behalf of the debtor firm, the action is said to be involuntary bankruptcy.
C) Once either a voluntary or involuntary petition is filed, the debtor firm is protected from any further legal action related to its debts until the bankruptcy proceedings are completed.
D) The filing of a petition triggers an automatic stay even before the court accepts the request.
E) An automatic stay suspends all judgments, collection activities, foreclosures, and repossessions of property by the creditors on any debt or claim that arose before the filing of the bankruptcy petition

Accepted Answer

The answer of All of the following are true of...

Question 3

Which of the following are commonly used strategic alternatives for failing firms?
A) Merge with another firm
B) Reach out of court voluntary settlement with creditors
C) File for protection from creditors from the U.S. bankruptcy court
D) A, B, and C
E) A and B only

Accepted Answer

All of these options are commonly used strategic alternatives for failing firms. A merger with another firm can provide the failing firm with resources and expertise they need to turn the business around. A voluntary settlement with creditors can help the firm avoid bankruptcy and get back on track financially. Filing for protection from creditors from the U.S. bankruptcy court can provide the firm with a fresh start and a plan to restructure and repay its debts. Combining all three options can give the failing firm the best chance at recovery.

Question 4

All of the following are conditions most favorable for reaching settlement outside of bankruptcy court except for
A) The debtor firm is willing to share all necessary information with its creditors
B) Creditors have confidence in the debtor firm's management.
C) The debtor firm has relatively few creditors.
D) The debtor firm has many creditors.
E) The period of economic distress afflicting the firm is expected to be short-lived.

Accepted Answer

Having many creditors complicates the process of reaching a settlement outside of bankruptcy court because it can be difficult to get all creditors to agree on the terms of the settlement. Fewer creditors typically make it easier to negotiate and reach an agreement.

Question 5

To determine which strategy to pursue,the failing firm's management needs to estimate which of the following:
A) Going concern value
B) Liquidation value
C) Selling price of the firm
D) A and B only
E) A, B, and C

Accepted Answer

The management of a failing firm should estimate the going concern value, liquidation value, and potential selling price to make an informed decision on the best strategy to pursue.

Question 6

Federal law prohibits trading in a bankrupt firm's securities.

Accepted Answer

Federal law does not prohibit trading in a bankrupt firm's securities, but there may be restrictions and risks associated with it.

Question 7

Smaller creditors have little incentive to attempt to hold up the agreement unless they receive special treatment.

Accepted Answer

Smaller creditors often have significant incentive to attempt to hold up an agreement if they believe they can secure better terms or special treatment by doing so, leveraging their consent as a critical component for the agreement's success.

Question 8

Financially distressed firms often are characterized by all of the following except for:
A) Underinvestment in operations
B) Employee layoffs
C) High levels of research and development spending
D) Declining product quality
E) Slower payments to suppliers

Accepted Answer

Financially distressed firms typically do not have high levels of research and development spending as they need to focus on cutting costs and improving their financial position. Underinvestment in operations, employee layoffs, declining product quality, and slower payments to suppliers are all common characteristics of financially distressed firms.

Question 9

Which of the following statements is not true?
A) Technical insolvency arises when a firm is unable to meet its obligations when they come due.
B) Legal insolvency occurs when a firm's liabilities exceed the fair market value of its assets.
C) A firm must be legally insolvent to enter bankruptcy.
D) Bankruptcy is a legal proceeding which protects a debtor firm from its creditors.
E) A firm is not considered bankrupt until its petition for bankruptcy is accepted by the court.

Accepted Answer

A firm can enter bankruptcy even if it is only technically insolvent. Legal insolvency is one reason for bankruptcy, but not the only reason.

Question 10

If a firm enters into a workout in which a voluntary negotiated agreement with debtors is achieved,the firm may lose its right to claim NOLs in its tax filing.

Accepted Answer

According to the IRS regulations, if a firm enters into a workout in which a voluntary negotiated agreement with creditors results in the partial or complete cancellation of the firm's indebtedness, the firm may lose its right to claim NOLs in its tax filing. This is because the cancellation of debt is treated as taxable income and the NOLs can only be used to offset taxable income.

Question 11

Economic distress arises when a firm's growth and investment prospects deteriorate,causing a reduction in the value of the business due to the deteriorating outlook for the firm's cash flow.

Accepted Answer

Economic distress is often caused by a reduction in a firm's growth and investment prospects, which in turn leads to a decline in the value of the business due to the negative impact on cash flow. Therefore, the statement is true.

Question 12

The leading causes of business failure include which of the following:
A) Recession
B) Excessive operating expenses
C) Excessive leverage
D) Management inexperience
E) All of the above

Accepted Answer

All of the listed options are leading causes of business failure. A recession can lead to a decrease in demand for a business's product or service, excessive operating expenses can eat into profits and cause cash flow issues, excessive leverage can make it difficult to repay debts, and management inexperience can result in poor decision-making and mismanagement of resources.

Question 13

While bankrupt firms generally are unable to meet the listing requirements of the major stock exchanges,their shares may trade in the over-the-counter market.

Accepted Answer

This statement is true. Bankrupt firms may not meet the listing requirements of major stock exchanges, but their shares may still trade in the over-the-counter market.

Question 14

Why would creditors be willing to give a portion of what they are owed by the debtor firm for equity in the reorganized firm?
A) They are legally obligated to do so under U.S. bankruptcy law.
B) Ownership in a firm is inherently more valuable than being a creditor.
C) The value of the stock may in the long run far exceed the amount of debt the creditors were willing to forgive.
D) Creditors understand that they can sue the firm at a later date for what they are owed.
E) None of the above.

Accepted Answer

Creditors may be willing to exchange a portion of their debt for equity in a reorganized firm because they believe that the value of the stock may in the long run far exceed the amount of debt they were willing to forgive. This can provide them with a greater return on their investment than if they continued to hold onto the debt.

Question 15

If the going concern value is less than the selling or liquidation price,the firm should seek the protection of the bankruptcy court.

Accepted Answer

If the going concern value is less than the selling or liquidation price, it may still be possible for the firm to negotiate with creditors, restructure or merge with another company to avoid bankruptcy. The decision to seek protection of the bankruptcy court should be based on a careful evaluation of all options and potential consequences.

Question 16

Moody's credit rating agency defines instances of default as which of the following:
A) Missed or delayed payment of interest or principal
B) Bankruptcy
C) Receivership
D) Any exchange (equity for debt) diminishing the value of what is owed to bondholders
E) All of the above

Accepted Answer

Moody's credit rating agency defines instances of default as any of the above options, which includes missed or delayed payment of interest or principal, bankruptcy, receivership, and any exchange (equity for debt) diminishing the value of what is owed to bondholders.

Question 17

All of the following represent different forms of debt restructuring except for
A) Debt extensions
B) Debt compositions
C) Share exchange ratios
D) Debt for equity swaps
E) A and D

Accepted Answer

All of the other choices listed represent different forms of debt restructuring. Debt extensions refers to extending the maturity date of a loan, while debt compositions refer to negotiating with creditors to settle debts for less than the full amount owed. Debt for equity swaps involve exchanging a portion of a company's debt for ownership in the company, and debt extensions involve exchanging debt for longer-term debt with more favorable terms. None of these options involve share exchange ratios, which are typically used in mergers and acquisitions to determine the relative value of each company's shares.

Question 18

If the selling price of the failing firm is less than the going concern and liquidation value,the firm should sell the firm to another party.

Accepted Answer

The decision to sell a firm should consider more than just the current selling price relative to the going concern and liquidation value. Other factors such as potential for turnaround, strategic value to buyers, and market conditions also play crucial roles in this decision.

Question 19

All of the following are true except for
A) Chapter 15 deals with international or cross-border bankruptcies.
B) Chapter 11 deals with reorganizing the firm.
C) Chapter 7 defines the process and priorities of the liquidation process for commercial businesses.
D) Chapter 11 also addresses issues pertaining to personal bankruptcy.
E) A and B

Accepted Answer

Chapter 11 addresses issues pertaining to corporate bankruptcy and does not address personal bankruptcy. Personal bankruptcy is governed by Chapter 13 or Chapter 7.

Question 20

Debt restructuring of a bankrupt firm is usually accomplished in which of the following ways:
A) An extension
B) A composition
C) A debt for equity swap
D) Some combination of a, b, or c
E) All of the above

Accepted Answer

Debt restructuring can involve an extension, a composition, a debt for equity swap, or a combination of these methods, making all options applicable.

Quiz 17: Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Sales within the protection of Chapter 11 reorganization may be accomplished either by a negotiated private sale to a particular purchaser or through a public auction.

All of the following are true of the bankruptcy process except for

Which of the following are commonly used strategic alternatives for failing firms?

All of the following are conditions most favorable for reaching settlement outside of bankruptcy court except for

To determine which strategy to pursue,the failing firm's management needs to estimate which of the following:

Federal law prohibits trading in a bankrupt firm's securities.

Smaller creditors have little incentive to attempt to hold up the agreement unless they receive special treatment.

Financially distressed firms often are characterized by all of the following except for:

Which of the following statements is not true?

If a firm enters into a workout in which a voluntary negotiated agreement with debtors is achieved,the firm may lose its right to claim NOLs in its tax filing.

Economic distress arises when a firm's growth and investment prospects deteriorate,causing a reduction in the value of the business due to the deteriorating outlook for the firm's cash flow.

The leading causes of business failure include which of the following:

While bankrupt firms generally are unable to meet the listing requirements of the major stock exchanges,their shares may trade in the over-the-counter market.

Why would creditors be willing to give a portion of what they are owed by the debtor firm for equity in the reorganized firm?

If the going concern value is less than the selling or liquidation price,the firm should seek the protection of the bankruptcy court.

Moody's credit rating agency defines instances of default as which of the following:

All of the following represent different forms of debt restructuring except for

If the selling price of the failing firm is less than the going concern and liquidation value,the firm should sell the firm to another party.

All of the following are true except for

Debt restructuring of a bankrupt firm is usually accomplished in which of the following ways: