Deck 16: Financially Troubled Ventures Turnaround Opportunities

Question 1

A cross-default provision and an acceleration provision both cause principal obligations on a loan to become immediately due.

Answer 1

False

Question 2

Foreclosure is a legal process used by entrepreneurs to avoid diluting their ownership positions.

Answer 2

False

Question 3

A Chapter 11 bankruptcy filing requires liquidation of the venture.

Answer 3

False

Question 4

An acceleration provision provides that all future interest and principal obligations on a loan become immediately due when default occurs.

Question 5

A cross-default provision provides that defaulting on one loan makes the venture liquidate all other loans.

Question 6

Cash flow insolvency occurs when a venture's cash flow is insufficient to meet its' current contractual equity obligations.

Question 7

During the rapid-growth stage of a venture's life cycle, the relevant financing and operating decisions encountered are to go public, or to sell or merge the firm.

Question 8

Balance sheet insolvency exists when a venture has negative net debt.

Question 9

The two basic options available to resolve a venture in financial distress are restructure or liquidate.

Question 10

Financial distress occurs when cash flow is insufficient to meet current debt obligations.

Question 11

A debt payments extension involves postponing due dates for interest and principal payments.

Question 12

About two-thirds of new businesses with employees survive more than two years, and about one-half make it past the five-year mark.

Question 13

Balance sheet insolvency exists when a venture's total assets exceeds its total debt.

Question 14

Foreclosure occurs when cash flows are insufficient to meet current debt obligations.

Question 15

A debt composition change occurs when creditors reduce their contractual claims against the venture.

Question 16

When a venture's cash flow is insufficient to meet its current contractual debt obligations, asset flow insolvency exists.

Question 17

Foreclosure is the legal process used by creditors to try to collect amounts owed on loans in default.

Question 18

Balance sheet insolvency exists when a venture has negative book equity or net worth.

Question 19

During the development, startup, and survival stages of a venture's life cycle, the relevant financing and operating decisions faced are either restructuring or liquidating.

Question 20

Cash flow insolvency exists when a venture's cash flow is insufficient to meet its current contractual debt obligations.

Question 21

When one or more creditors refuse to agree to the reorganization terms of a venture in the hopes of making a larger individual recovery, it is said that a holdout problem has arisen.

Question 22

A prepackaged bankruptcy involves using a combination of a private workout and a Chapter 7 liquidation.

Question 23

A voluntary bankruptcy petition is filed by the venture's management.

Question 24

During the development stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A)screening business ideas
B)preparing the business plan
C)obtaining seed financing
D)managing the ongoing operations

Question 25

Operations restructuring always involves growing a venture's revenues relative to its costs.

Question 26

A Chapter 7 bankruptcy filing permits a venture in financial distress the opportunity to reorganize.

Question 27

Asset restructuring involves improving the working-capital-to-sales relationship and/or selling off fixed assets.

Question 28

An involuntary bankruptcy petition is filed by the venture's management.

Question 29

During the maturity stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A)managing ongoing operations
B)maintaining and adding value
C)obtaining seasoned financing
D)obtaining seed financing

Question 30

The common pool problem exists because individual creditors have the incentive to foreclose on the venture even though it is worth more as a going concern.

Question 31

Ventures that reorganize under Chapter 11 bankruptcies may still be liquidated via Chapter 7 bankruptcies.

Question 32

During the startup stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A)creating and building value
B)choosing the organizational form
C)preparing initial financial statements
D)obtaining startup financing

Question 33

A venture is bankrupt when a petition for bankruptcy is filed with a federal bankruptcy court.

Question 34

A venture in financial distress tries to reorganize under Chapter 7 of the U.S. Bankruptcy Code.

Question 35

The transfer of title to the venture's assets to a third-party trustee is called assignment.

Question 36

Operations restructuring involves growing revenues relative to costs and/or cutting costs relative to the venture's revenues.

Question 37

A private workout is a voluntary agreement between a venture's owners and its shareholders that provides for a financial restructuring of the venture's outstanding debt.

Question 38

During the survival stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A)monitoring financial performance
B)obtaining seasoned financing
C)projecting cash needs
D)obtaining first-round financing

Question 39

During the rapid growth stage of a venture's life cycle, which of the following is not a basis for operating or financial decisions?

A)creating and building value
B)obtaining additional financing
C)choosing the organizational form
D)examining exit opportunities

Question 40

Increasing revenues relative to current costs is the same thing as cutting costs relative to current revenues.

Question 41

When a venture is in financial distress but believes it has a turnaround opportunity, which of the following will not apply?

A)operations restructuring
B)asset restructuring
C)private restructuring
D)financial restructuring

Question 42

Which of the following refers to the failure to meet loan interest or principal payments when due?

A)insolvency
B)loan default
C)a cross-default provision
D)foreclosure

Question 43

Operations restructuring involves:

A)improving the working-capital-to-sales relationship
B)postponing due dates for interest and principal payments
C)selling off fixed assets
D)cutting costs relative to the venture's revenues

Question 44

When a venture's cash on hand is insufficient to pay currently due liabilities, this is referred to as:

A)financial distress
B)balance sheet insolvency
C)bankruptcy
D)liquidation

Question 45

Financial restructuring involves:

A)growing revenues relative to costs
B)reducing the cash conversion cycle
C)issuing mortgage debt
D)a debt composition change and a debt payments extension

Question 46

Your firm has an average collection period of 36.5 days. Sales revenues are $30,000. What is your firm's average investment in accounts receivables?

A)$3,650
B)$3,000
C)$1,000
D)$822

Question 47

When a venture files for legal bankruptcy through Chapter 11 and attempts to reorganize, which of the following is not likely to be a possible outcome?

A)Chapter 7 liquidation
B)a merger
C)asset restructuring
D)reorganization and continuation of operations

Question 48

Which of the following refers to when a venture has a negative equity or net worth position and/or when its cash flow is insufficient to meet current debt obligations?

A)insolvency
B)loan default
C)an acceleration provision
D)foreclosure

Question 49

Which of the following refers to changing the contractual terms of the existing debt obligations?

A)a debt payments extension
B)asset restructuring
C)financial restructuring
D)a debt composition change

Question 50

Your firm had net sales of $80,000, receivables of $20,000, and a cost of goods sold of $522,000 this past year. What were the days sales outstanding?

A)91 days
B)48 days
C)36 days
D)5 days

Question 51

Operations restructuring involves:

A)growing revenues relative to costs
B)reducing the amount of outstanding debt
C)reducing net working capital
D)reducing the cash conversion cycle

Question 52

Which of the following provides that all future interest and principal obligations on a loan become immediately due when default occurs?

A)insolvency
B)loan default
C)an acceleration provision
D)a cross-default provision

Question 53

Which of the following refers to the legal process used by creditors to try to collect amounts owed on loans in default?

A)foreclosure
B)loan default
C)an acceleration provision
D)a cross-default provision

Question 54

The legal process that facilitates a creditor's ability to collect on loans in default is known as:

A)an acceleration provision
B)a holdout provision
C)foreclosure
D)a private workout

Question 55

Financial restructuring involves:

A)improving the working-capital-to-sales relationship
B)growing revenues relative to costs
C)changing the composition of existing debt claims against the venture
D)cutting costs relative to the venture's revenues

Question 56

Asset restructuring involves:

A)improving the working-capital-to-sales relationship
B)growing revenues relative to costs
C)changing the contractual terms of existing debt obligations
D)cutting costs relative to the venture's revenues

Question 57

Which of the following provides that defaulting on one loan places all loans in default?

A)insolvency
B)loan default
C)an acceleration provision
D)a cross-default provision

Question 58

Which of the following is not considered to be a primary way for resolving financial distress?

A)operations restructuring
B)financial restructuring
C)asset restructuring
D)management restructuring

Question 59

Your firm has inventory of $188,000, cost of goods sold of $522,000, and accounts receivable of $214,000. What is your inventory conversion period?

A)98 days
B)152 days
C)168 days
D)131 days

Question 60

Balance sheet insolvency occurs when a venture has:

A)positive net worth
B)total liabilities less than total assets
C)negative retained earnings but positive net worth
D)total liabilities greater than total assets

Question 61

Which of the following refers to when creditors reduce their contractual claims against the venture?

A)a debt payments extension
B)asset restructuring
C)operating restructuring
D)a debt composition change

Question 62

A venture may file for legal bankruptcy in order to liquidate the venture under which of the following chapters?

A)Chapter 1
B)Chapter 5
C)Chapter 7
D)Chapter 11

Question 63

The Federal Bankruptcy Reform Act was implemented between:

A)1900-1902
B)1930-1932
C)1978-1979
D)2008-2009

Question 64

Which of the following restricts the ability of individual creditors to foreclose to try to recover their individual claims?

A)an automatic stay provision
B)a holdout problem
C)a cram-down procedure
D)net worth requirements

Question 65

A venture may file for legal bankruptcy in order to attempt to reorganize under which of the following chapters?

A)Chapter 13
B)Chapter 5
C)Chapter 7
D)Chapter 11

Question 66

Which of the following is not a typical outcome of a Chapter 11 bankruptcy?

A)successful reorganization and the continuation of operations
B)liquidation under Chapter 7 bankruptcy legislation
C)a government bailout resulting in continued operations at the expense of operational independence from the government
D)merging the venture with another firm

Question 67

Which of the following refers to when a bankruptcy court accepts a reorganization plan for all creditors, including dissenting creditor classes?

A)an automatic stay provision
B)a holdout problem
C)a cram-down procedure
D)net worth requirements

Question 68

The rule governing hierarchical order in which claim payments must be made during a bankruptcy is known as the:

A)cram-down procedure
B)absolute priority rule
C)prepackaged bankruptcy rule
D)involuntary bankruptcy rule

Question 69

Which of the following refers to postponing due dates for interest and principal on loans and payments on credit purchases?

A)a debt payments extension
B)asset restructuring
C)operations restructuring
D)a debt composition change

Question 70

When individual creditors have an incentive to foreclose on a venture, even though it is worth more as a going concern, it is said that there is a:

A)common pool problem
B)holdout problem
C)solvency problem
D)cram-down problem