Question 1

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

Accepted Answer

The par value of a share represents its nominal value, and it is not related to the market value of the stock. Therefore, equityholders would not receive any money based solely on their ownership of shares with a par value of $0.50 each.

Question 2

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

Accepted Answer

Secured creditors typically receive 100% of their claim because their loans are backed by collateral, which can be sold to cover the debt.

Question 3

Some of the various events which typically occur around the period of financial distress for a firm are:

Accepted Answer

C

Question 4

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 occurs when a company is unable to generate sufficient operating cash flow to pay its current obligations, putting it at risk of defaulting on loans, delaying payments to vendors, or issuing stock at unfavorable prices to raise capital. Delayed payments (choice A) and elimination of cash distributions (choice D) may be symptoms of financial distress, but they do not directly indicate that corrective action is required. Market value decline (choice B) can be a sign of investor pessimism and lower future prospects, but it does not necessarily lead to financial distress unless it makes it harder for the company to raise new funds or service existing debts.

Question 5

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 can not 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 6

How much should the unsecured creditors receive?

Accepted Answer

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

Question 7

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

Accepted Answer

In a bankruptcy case, priority is given to paying off the administrative expenses (such as legal and trustee fees), then the secured creditors (who have a lien on the debtor's property), followed by the unsecured creditors (who do not have a lien), and finally any remainder goes to the shareholders. Therefore, option B is the correct answer. Option A is incorrect as shareholders are only paid after the other parties have been paid. Option C is also incorrect as the order of payment is not accurate. Option D is incorrect as shareholders are not given priority over other parties with a legal right to payment.

Question 8

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.

Question 9

Stock-based insolvency is a:

Accepted Answer

Stock-based insolvency is a balance sheet measurement that occurs when a company's liabilities exceed the market value of its assets. This means the company may not be able to pay its debts with its current assets, which can result in bankruptcy or insolvency.

Question 10

Bankruptcy reorganizations are used by management to:

Accepted Answer

Bankruptcy reorganizations are used to provide time to turn the business around. It allows the company to restructure its debt and operations in order to become profitable again. Forestalling liquidation is not always possible, and the courts do not need time to set up an administrative structure in all cases.

Question 11

Insolvency can be defined as:

Accepted Answer

Insolvency refers to a situation where an individual or company is unable to pay their debts as they become due. It is different from being illiquid (B) which means having assets that cannot be easily converted into cash. Not having cash (A) or an inability to increase one's debts (D) are not necessarily indicative of insolvency. Option E is also not the best choice, as it only applies in certain cases where the present value of payments is less than the total value of assets.

Question 12

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

Accepted Answer

In bankruptcy, the priority is typically administrative expenses first, followed by wage claims up to a certain limit, then government tax claims, debtholder claims, and finally equityholder claims.

Question 13

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 14

How much should the secured creditors receive?

Accepted Answer

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

Question 15

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

Accepted Answer

Negative earnings, sales declines and workforce reductions are all indicators of financial distress. This can lead to bankruptcy or other financial difficulties for the company.

Question 16

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 17

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...

Quiz 31: Financial Distress