Question 1

A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although not immediately.

Accepted Answer

An extension is an arrangement where creditors agree to extend the payment period, allowing the insolvent firm more time to pay its debts in full.

Question 2

A(n) ________ replaces the existing operating management of an insolvent firm with a selected creditor committee.

Accepted Answer

This is describing a creditor control, where the management of an insolvent firm is replaced by a selected creditor committee. The other options don't fit this description; composition refers to a plan to settle debts, extension refers to a delay in payment deadlines, and liquidation refers to the process of selling off assets to pay creditors.

Question 3

Which of the following represents a disadvantage for holding companies?

Accepted Answer

Holding companies often use leverage to acquire subsidiaries, which can increase financial risk if the subsidiaries do not perform well.

Question 4

In a voluntary settlement, one group of creditors having claims of $1,000,000 will be immediately paid 95 cents on a dollar. The remainder of the creditors will postpone payment an additional 60 days. This is an example of ________.

Accepted Answer

This is a combination of a composition (where one group of creditors receives immediate payment) and an extension (where the remaining creditors have postponed payment).

Question 5

The various causes that increase the chances of business failures are current ratio of 1.33, solvency ratio of greater than 20%, and rapid decrease in days' sales outstanding.

Accepted Answer

These factors are actually indicators of financial stability and would decrease the chances of business failure. A current ratio of 1.33 indicates that the company has enough current assets to cover its current liabilities, a solvency ratio of greater than 20% indicates that the company has enough assets to cover its long-term debt, and a rapid decrease in days' sales outstanding indicates that the company is collecting its accounts receivable more quickly, improving its cash flow.

Question 6

________ is an arrangement initiated by a debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm.

Accepted Answer

This scenario describes a voluntary settlement, which is an agreement initiated by the debtor firm to negotiate with creditors about a plan for sustaining or liquidating the firm. A golden parachute refers to a compensation package given to top executives if the firm is sold, while greenmail is a tactic used by a company to prevent a hostile takeover by repurchasing its own stock at a premium price. Chapter Seven bankruptcy is a legal process in which a trustee is appointed to liquidate assets and distribute funds to creditors.

Question 7

A(n) ________ is a pro rata cash settlement of creditor claims.

Accepted Answer

A composition is a voluntary agreement between a debtor and creditors where the debtor agrees to pay a pro rata cash settlement of creditor claims in exchange for release from further liability. This is different from a liquidation where assets are sold to pay off creditors or an extension where payment terms are extended but the full amount is still owed. A creditor control agreement is not a common term in bankruptcy or debt restructuring.

Question 8

Bankruptcy is business failure that occurs when a firm's liabilities exceed the fair market value of its assets.

Accepted Answer

Bankruptcy occurs when a company's liabilities exceed the fair market value of its assets and it is unable to meet its financial obligations. This leads to a situation where the company's assets are sold to pay off its debts, and shareholders and creditors may lose some or all of their investments.

Question 9

Which of the following increases the chances of business failures?

Accepted Answer

When liabilities exceed the market value of assets, it indicates that the business may not be able to pay off its debts and obligations in the long run, which increases the risk of business failure. A high provision for doubtful accounts and a current ratio of 2:1 suggest that the business is managing its finances well, while a book value of assets that exceeds liabilities indicates that the business has a strong financial position.

Question 10

In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the firm's operating management and operates the firm until all claims have been settled.

Accepted Answer

In a voluntary settlement, composition is an arrangement where creditors agree to receive a portion of the amount owed to them, usually in installments, in exchange for releasing the debtor from the remaining debt. It does not involve the replacement of the firm's operating management by the creditor committee.

Question 11

The various causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

Accepted Answer

Mismanagement, poor economic conditions, and corporate maturity are all common causes of business failure.

Question 12

In a voluntary settlement, each creditor will be paid only 45 cents on a dollar immediately. This is an example of ________.

Accepted Answer

A voluntary settlement is a type of composition agreement where the debtor negotiates with creditors to pay only a percentage of the amount owed immediately. In this case, the creditors will be paid only 45 cents on a dollar immediately, which means they have agreed to accept less than the full amount owed.

Question 13

Technical insolvency occurs when a firm's liabilities exceed the book value of its assets.

Accepted Answer

The answer of Technical insolvency occurs when a firm's liabilities...

Question 14

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

Accepted Answer

Recapitalization involves restructuring a company's debt and equity mix. In many cases, this can involve exchanging debt for equity or extending the maturity of existing debt. Therefore, the statement is true.

Question 15

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily.

Accepted Answer

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for liquidating a bankrupt firm, not reorganizing it. Chapter 11 is the one that deals with reorganization.

Question 16

In ________, an assignment may be made by the creditors of an insolvent firm to a third party who then has the power to liquidate the firm's assets.

Accepted Answer

In a voluntary private liquidation, creditors of an insolvent firm can assign the task of liquidating the firm's assets to a third party. This process allows for the orderly sale of assets outside of formal bankruptcy proceedings.

Question 17

One of the responsibilities of a debtor in possession (DIP) is the liquidation of a bankrupt firm's assets.

Accepted Answer

One of the responsibilities of a DIP is to manage the operations of the bankrupt firm and to propose a plan for reorganization, not liquidation of assets. The goal of reorganization is to keep the company in business and repay creditors over time. Liquidation is a last resort and is handled by a trustee, not the DIP.

Question 18

Julie's Tanning Systems has an estimated liquidation value (after all prior claims have been satisfied) of $3,000,000, $1,500,000 from fixed assets, and $1,500,000 from current assets. The firm's value as a going concern is $4,000,000. The firm's current capital structure is as follows:  *Secured by fixed assets.
Prepare a table indicating the amount, if any, to be distributed to each claimant, in the event of liquidation.

Accepted Answer

The answer of Julie's Tanning Systems has an estimated liquidation...

Question 19

In a voluntary settlement, each creditor will be paid 20 cents on a dollar in 120 days. The remaining 80 cents on a dollar will be paid within an additional 60 days. This is an example of ________.

Accepted Answer

The answer of In a voluntary settlement, each creditor will...

Question 20

Which of the following increases the chances of business failures?

Accepted Answer

Corporate maturity refers to the age or life of a business. A new, inexperienced business is more likely to fail than a well-established one with a proven track record. Therefore, a lack of corporate maturity increases the chances of business failures. The other choices (A, B, and C) suggest healthy financial ratios, which reduce the risk of failure.

Quiz 18: Mergers, Lbos, Divestitures, and Business Failure

A(n) ________ is an arrangement whereby an insolvent firm's creditors receive full payment, although not immediately.

A(n) ________ replaces the existing operating management of an insolvent firm with a selected creditor committee.

Which of the following represents a disadvantage for holding companies?

In a voluntary settlement, one group of creditors having claims of $1,000,000 will be immediately paid 95 cents on a dollar. The remainder of the creditors will postpone payment an additional 60 days. This is an example of ________.

The various causes that increase the chances of business failures are current ratio of 1.33, solvency ratio of greater than 20%, and rapid decrease in days' sales outstanding.

________ is an arrangement initiated by a debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm.

A(n) ________ is a pro rata cash settlement of creditor claims.

Bankruptcy is business failure that occurs when a firm's liabilities exceed the fair market value of its assets.

Which of the following increases the chances of business failures?

In a voluntary settlement, composition is an arrangement in which the creditor committee replaces the firm's operating management and operates the firm until all claims have been settled.

The various causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

In a voluntary settlement, each creditor will be paid only 45 cents on a dollar immediately. This is an example of ________.

Technical insolvency occurs when a firm's liabilities exceed the book value of its assets.

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily.

In ________, an assignment may be made by the creditors of an insolvent firm to a third party who then has the power to liquidate the firm's assets.

One of the responsibilities of a debtor in possession (DIP) is the liquidation of a bankrupt firm's assets.

In a voluntary settlement, each creditor will be paid 20 cents on a dollar in 120 days. The remaining 80 cents on a dollar will be paid within an additional 60 days. This is an example of ________.

Which of the following increases the chances of business failures?