Question 1

Insolvency can be defined as:

Accepted Answer

Insolvency refers to an individual or company's inability to pay off their debts as they become due. It is not simply a lack of cash or being illiquid, as a financially stable entity may temporarily have issues with liquidity. Insolvency refers to a situation where the present value of payments to creditors is less than the value of the entity's assets.

Question 2

What is the correct priority of the following claims,once a corporation is determined to be bankrupt?

Accepted Answer

The correct priority for claims in a bankruptcy situation typically starts with administrative expenses, followed by specific limited wage claims, then government tax claims, and finally claims by debtholders and equity holders, with equity holders being last. This reflects the general legal framework for prioritizing claims to ensure that operational costs and employees' immediate needs are addressed first, followed by obligations to the government, and then investors and lenders according to their risk exposure.

Question 3

What will the equity holders receive if they had 5 million shares with a par value of $0.50 each?

Accepted Answer

The par value of a share is the minimum amount that must be paid by the shareholders upon their purchase. It does not dictate the actual value of the shares or the amount that shareholders will receive upon liquidation. Therefore, the equity holders will not receive any amount based solely on their par value shares.

Question 4

One of the various events which typically occurs around the period of financial distress for a firm is:

Accepted Answer

During a period of financial distress, a firm may need to reduce its dividend payments in order to conserve cash and improve liquidity. This is a common event that occurs when a company is facing financial difficulties. Continued earning losses and steady growth are not necessarily indicative of financial distress, and dividend increases are highly unlikely during this period.

Question 5

A corporation is adjudged bankrupt.When do the shareholders receive any payment?

Accepted Answer

When a corporation is adjudged bankrupt, the trustee liquidates the assets and pays the administrative expenses and the secured creditors first, followed by the unsecured creditors. If there is any remaining amount after those payments, then the shareholders may receive some payment, but they are not given priority over the creditors. Therefore, option B is the correct option.

Question 6

What will the equity holders receive if they had 5 million shares with a par value of $0.50 each?

Accepted Answer

The par value of a share represents the minimum amount that a shareholder can receive in case of liquidation. Therefore, it does not represent the actual value of the shares. The equity holders will only receive money if the company decides to distribute dividends or if they sell their shares on the market. As such, without any additional information, it is impossible to determine what the equity holders will receive, and the answer is D (i.e. $0).

Question 7

Bankruptcy reorganizations are used by management to:

Accepted Answer

Bankruptcy reorganizations are used to provide time for management to turn the business around and make it profitable again. It allows for a plan to be created to repay creditors while still keeping the business operating. While forestalling liquidation and setting up an administrative structure in the court are also part of the process, the primary goal is to reorganize the business.

Question 8

How much should the secured creditors receive?

Accepted Answer

Secured creditors are typically paid in full from the proceeds of the collateral securing their loans. If the collateral is worth $1,500,000, they should receive $1,500,000.

Question 9

Stock-based insolvency is a(an):

Accepted Answer

Stock-based insolvency is a balance sheet measurement, as it refers to the situation where the liabilities of a company exceed the value of its assets, including its stock equity. This can lead to the insolvency of the company and possibly bankruptcy.

Question 10

How much and what percentage of their claim will the unsecured creditors receive,in total?

Accepted Answer

The answer of How much and what percentage of their...

Question 11

How much and what percentage of their claim will the secured creditors receive,in total?

Accepted Answer

Secured creditors typically receive the full amount of their claim, which is $1,200,000 in this case, representing 100% of their claim.

Question 12

Which of the following statements about private workouts of financial distress is NOT true?

Accepted Answer

The answer of Which of the following statements about private...

Question 13

How much should the unsecured creditors receive?

Accepted Answer

The unsecured creditors should receive $1,000,000 as it is the amount specified in the options that is typically allocated to unsecured creditors in a bankruptcy or settlement scenario.

Question 14

Steel Pony decides to reorganize and assumes the "going concern" value of the firm is a strong and reliable estimate.Management feels that for the firm to have a stable financial structure and for any plan to be acceptable to the current senior debtholders the new debt cannot represent more than twice equity and be made up of 40% senior debt.Determine the distribution of new securities under the reorganization.Assuming all creditors are treated according to APR.

Accepted Answer

The answer of Steel Pony decides to reorganize and assumes...

Question 15

Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?

Accepted Answer

Financial distress is when a firm is unable to generate sufficient cash flows to pay its obligations as they come due. Option A describes a potential symptom of financial distress, but not the root cause. Option B describes a decline in market value, but not a necessarily distressed situation. Option D describes a decision to eliminate cash distributions, but not necessarily due to financial distress.

Question 16

How much should the secured creditors receive?

Accepted Answer

Secured creditors are typically paid based on the value of the collateral securing their loans. Without additional context, $2,000,000 is likely the amount they are entitled to receive.

Question 17

Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amounts to 5%,determine the distribution of the proceeds under the rules of absolute priority.

Accepted Answer

The answer of Steel Pony decides to file for formal...

Question 18

Whether bankruptcy is entered either voluntarily or involuntarily,the major difference by CCCA and Bankruptcy and Insolvency Act is:

Accepted Answer

The major difference between CCCA and Bankruptcy and Insolvency Act is that liquidation occurs in Bankruptcy and Insolvency Act but reorganization is the objective under CCCA. Therefore, choice C is the best answer. Choice A is incorrect as it describes the objectives in reverse for both acts. Choice B is incorrect as priority of claims does exist under CCCA. Choice D is incorrect as lawyers fees may be necessary under both acts.

Question 19

How much should the unsecured creditors receive?

Accepted Answer

The answer of How much should the unsecured creditors receive?
...

Question 20

A firm that has a series of negative earnings,sales declines and workforce reductions is likely to head:

Accepted Answer

A series of negative earnings, sales declines, and workforce reductions are clear signs of financial distress. The company may be struggling to generate revenue, which could make it difficult to pay creditors and meet financial obligations. As a result, the company may need to consider restructuring or filing for bankruptcy. A change in management or a new financing may not be enough to address the underlying issues causing the negative results, and a merger may be difficult to achieve if the company is financially distressed.

Quiz 31: Financial Distress

Insolvency can be defined as:

What is the correct priority of the following claims,once a corporation is determined to be bankrupt?

What will the equity holders receive if they had 5 million shares with a par value of $0.50 each?

One of the various events which typically occurs around the period of financial distress for a firm is:

A corporation is adjudged bankrupt.When do the shareholders receive any payment?

What will the equity holders receive if they had 5 million shares with a par value of $0.50 each?

Bankruptcy reorganizations are used by management to:

How much should the secured creditors receive?

Stock-based insolvency is a(an) :

How much and what percentage of their claim will the unsecured creditors receive,in total?

How much and what percentage of their claim will the secured creditors receive,in total?

Which of the following statements about private workouts of financial distress is NOT true?

How much should the unsecured creditors receive?

Financial distress can be best described by which of the following situations in which the firm is forced to take corrective action?

How much should the secured creditors receive?

Steel Pony decides to file for formal bankruptcy and expects to sell the firm for the "going concern" value and pay administrative fees which amounts to 5%,determine the distribution of the proceeds under the rules of absolute priority.

Whether bankruptcy is entered either voluntarily or involuntarily,the major difference by CCCA and Bankruptcy and Insolvency Act is:

How much should the unsecured creditors receive?

A firm that has a series of negative earnings,sales declines and workforce reductions is likely to head: