Deck 31: Financial Distress

Question 1

Insolvency can be defined as:

A) not having cash.
B) being illiquid.
C) an inability to pay one's debts.
D) an inability to increase one's debts.
E) the present value of payments being less than assets.

Answer 1

an inability to pay one's debts.

Question 2

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

A) Administrative expenses, wages claims not exceeding $2,000, government tax claims, debtholder and then equity holder claims.
B) Administrative expenses, wages claims not exceeding $2,000, government tax claims, equity holder and then debtholder claims.
C) All wage claims, administrative expenses, debtholder claims, government tax claims and equity holder claims.
D) All wage claims, administrative expenses, debtholder claims, equity holder claims and government tax claims.

Answer 2

Administrative expenses, wages claims not exceeding $2,000, government tax claims, debtholder and then equity holder claims.

Question 3

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

A) $0
B) $35,714
C) $583,333
D) $1,000,000

Answer 3

$0

Question 4

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

A) continued earning losses.
B) steady growth.
C) dividend reductions.
D) dividend increases.

Question 5

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

A) After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid before the creditors.
B) After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the unsecured creditors, and, then the shareholders divide any remainder.
C) After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the secured creditors, and then the unsecured creditors divide any remainder.
D) After the trustee liquidates the assets, the shareholders are paid first because they are the owners of the firm and have the principal stake.

Question 6

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

A) $1,000,000
B) $583,333
C) $35,714
D) $0

Question 7

Bankruptcy reorganizations are used by management to:

A) forestall the inevitable liquidation in all cases.
B) provide time to turn the business around.
C) allow the courts' time to set up an administrative structure.

Question 8

How much should the secured creditors receive?

A) $1,000,000
B) $1,500,000
C) $1,250,000
D) $1,333,333

Question 9

Stock-based insolvency is a(an):

A) income statement measurement.
B) balance sheet measurement.
C) book value measurement.
D) income statement and balance sheet measurement.

Question 10

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

A) $290,909; 36.36%
B) $300,000; 37.50%
C) $600,000; 75.00%
D) $100,000; 12.50%

Question 11

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

A) $1,200,000; 100.00%
B) $1,009,091; 84.10%
C) $900,000.00; 75.00%
D) $981,818; 81.82%

Question 12

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

A) Senior debt is replaced with junior debt.
B) Debt may be replaced by equity.
C) Private workouts account for about three quarters of all reorganizations.
D) Top management is dismissed or take pay reduction many times.

Question 13

How much should the unsecured creditors receive?

A) $300,000
B) $500,000
C) $1,000,000
D) $2,300,000

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.

Question 15

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

A) Cash payments are delayed to creditors.
B) The market value of the stock declines by 50%.
C) The firm's operating cash flows are insufficient to pay current obligations.
D) Cash distributions are eliminated because the board of directors considers the surplus account to be low.

Question 16

How much should the secured creditors receive?

A) $1,500,000
B) $2,000,000
C) $2,300,000
D) $3,000,000

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.

Question 18

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

A) that liquidation occurs in CCCA but reorganization is the objective under Bankruptcy and Insolvency Act.
B) that there is no priority of claims under Chapter CCCA.
C) that liquidation occurs in Bankruptcy and Insolvency Act but reorganization is the objective under CCCA.
D) that no lawyers fees are necessary under Bankruptcy and Insolvency Act.

Question 19

How much should the unsecured creditors receive?

A) $1,000,000
B) $500,000
C) $750,000
D) $667,000

Question 20

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

A) a change in management.
B) a merger.
C) a financial distress.
D) a new financing.