TB CHAP30

*Câu hỏi số 1
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 10%.
C. The firm's operating cash flow is insufficient to pay current obligations.
D. Cash distributions are eliminated because the board of directors considers the surplus account to
be low.
E. None of these.

*Câu hỏi số 2
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.

*Câu hỏi số 3
Stock-based insolvency is a:
A. income statement measurement.
B. balance sheet measurement.
C. a book value measurement only.
D. Both income statement measurement and a book value measurement only.
E. Both balance sheet measurement and a book value measurement only.

*Câu hỏi số 4
Flow-based insolvency is:
A. a balance sheet measurement.
B. a negative equity position.
C. when operating cash flow is insufficient to meet current obligations.
D. inability to pay one's debts.
E. Both when operating cash flow is insufficient to meet current obligations and inability to
pay one's

*Câu hỏi số 5
Financial restructuring can occur as:
A. a private workout.
B. an employee buy-out.
C. a bankruptcy reorganization.
D. Both a private workout and a bankruptcy reorganization.
E. Both an employee buy-out and a bankruptcy reorganization.

*Câu hỏi số 6
Financial distress can involve which of the following:
A. asset restructuring.
B. financial restructuring.
C. liquidation.
D. All of these.
E. None of these.

*Câu hỏi số 7
APR, as it relates to financial distress, means the rules of:
A. absolute profitability.
B. arbitration priority.
C. absolute priority.
D. arbitration profitability.
E. automatic profitability.

*Câu hỏi số 8
The difference between liquidation and reorganization is:
A. reorganization terminates all operations of the firm and liquidation only terminates non-profitable
operations.
B. liquidation terminates only profitable operations and reorganization terminates only non-profitable
operations.
C. liquidation terminates all operations and reorganization maintains the option of the firm as a
going concern.
D. liquidation only deals with current assets and reorganization only consolidates debt.
E. None of these.

*Câu hỏi số 9
A firm that has a series of negative earnings, sales declines and workforce reductions is likely
headed to:
A. acquisition of another firm.
B. a merger.
C. financial distress.
D. new financing.
E. None of these.

*Câu hỏi số 10
Some of the various events which typically occur around the period of financial distress for a
firm are:
A. continued increase in earnings.
B. steady growth.
C. dividend reductions.
D. Both continued increase in earnings and steady growth.
E. Both continued increase in earnings and dividend reductions.

*Câu hỏi số 11
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.
D. All of these.
E. None of these.

*Câu hỏi số 12
A firm has several options available to it in times of financial distress. The firm may:
A. reduce capital and R&D spending.
B. raise new funds by selling securities or major assets.
C. file for bankruptcy.
D. negotiate with lenders.
E. All of these statements are true.

*Câu hỏi số 13
Most firms in financial distress do not fail and cease to exist. Many firms can actually benefit
from distress by:
A. forcing a firm to reevaluate their core operations.
B. realigning their capital structure to reduce interest costs.
C. entering Chapter 11 and liquidating the firm.
D. Both forcing a firm to reevaluate their core operations; and realigning their capital structure
to reduce interest costs.
E. Both forcing a firm to reevaluate their core operations; and entering Chapter 11 and liquidating the

*Câu hỏi số 14
Whether bankruptcy is entered voluntarily or involuntarily the major difference between
Chapter 7 and Chapter 11 is:
A. that liquidation occurs in Chapter 11 but reorganization is the objective under Chapter 7.
B. that there is no priority of claims under Chapter 11.
C. that liquidation occurs in Chapter 7 but reorganization is the objective under chapter 11.
D. no lawyers' fees are necessary under Chapter 7.
E. None of these.

*Câu hỏi số 15
If a firm has a stock based insolvency in both book and market value terms and liquidates:
A. the payoff will not be 100% to all investors.
B. the unsecured creditors are likely to get less than full value.
C. the equityholders typically should receive nothing.
D. All of these.
E. None of these.

*Câu hỏi số 16
A firm in financial distress that reorganizes:
A. continues to run the business as a going concern.
B. must have acceptance of the plan by the creditors.
C. may distribute new securities to creditors and shareholders.
D. All of these.
E. None of these.

*Câu hỏi số 17
A corporation is adjudged bankrupt under Chapter 7. 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.
E. None of these.

*Câu hỏi số 18
What is the absolute priority rule of the following claims once a corporation is determined to
be bankrupt?
A. Administrative expenses, wages claims, government tax claims, debtholder and then equity
holder claims
B. Administrative expenses, wages claims, government tax claims, equity holder and then debtholder
claims
C. Wage claims, administrative expenses, debtholder claims, government tax claims and equity
holder claims
D. Wage claims, administrative expenses, debtholder claims, equity holder claims and government
tax claims
E. None of these

*Câu hỏi số 19
The absolute priority rule:
A. is set to ensure senior claims are paid first.
B. is the priority rule in liquidations.
C. distributes proceeds of secured assets sales to the secured creditors first and the remainder to the
unsecured.
D. All of these.
E. None of these.

*Câu hỏi số 20
Many corporations choose Chapter 11 bankruptcy proceedings voluntarily because the
management can:
A. take up to 120 days to file a reorganization plan.
B. continue to run the business.
C. reorganize if the required fractions of creditors approve of the plan and it is confirmed when the
reorganization takes place.
D. All of these.
E. None of these.

*Câu hỏi số 21
Which of the following statements about private workouts of financial distress is NOT true?
A. Senior debt is usually replaced with junior debt.
B. Debt is usually replaced with equity.
C. Private workouts account for about three quarters of all reorganizations.
D. Top management is often dismissed or takes pay reductions.
E. None of these.

*Câu hỏi số 22
Successful private workouts are better for firms than formal bankruptcy because:
A. direct costs are considerably lower in private workouts.
B. private workout firms can issue new debt senior to all prior debt.
C. stock price increases are greater for private workouts than for firms emerging from formal
bankruptcy.
D. Both direct costs are considerably lower in private workouts; and private workout firms can issue
new debt senior to all prior debt.
E. Both direct costs are considerably lower in private workouts; and stock price increases are
greater for private workouts than for firms emerging from formal bankruptcy.

*Câu hỏi số 23
Equity Holders may prefer a formal bankruptcy filing because:
A. the firm can issue debtor in possession debt.
B. the firm can delay pre-bankruptcy interest payments.
C. the lack of information about the length and magnitude of the cash flow problem favors equity
holders.
D. All of these.
E. None of these.
*Câu hỏi số 24
Prepackaged bankruptcies are:
A. described as a combination of a private workout and a liquidation.
B. the easiest way to transfer wealth to the shareholders.
C. described as a combination of a completed private workout and the formal bankruptcy
filing.
D. All of these.
E. None of these.

*Câu hỏi số 25
In a prepackaged bankruptcy the firm:
A. and creditors agree to a private reorganization outside formal bankruptcy.
B. must reach agreement privately with most of the creditors.
C. will have difficulty when there are thousands of reluctant trade creditors.
D. All of these.
E. None of these.

*Câu hỏi số 26
The net payoff to creditors in formal bankruptcy may be low in present value terms because:
A. the financial structure may be complicated with several groups and types of creditors.
B. indirect costs of bankruptcy may have been costly in lost revenues and poor maintenance.
C. administrative costs are high and increase with the complexity and length of time in the formal
bankruptcy process.
D. All of these.
E. None of these.

*Câu hỏi số 27
Firms deal with financial distress by:
A. selling major assets.
B. merging with another firm.
C. issuing new securities.
D. exchanging debt for equity.
E. All of these.

*Câu hỏi số 28
Perhaps equally, if not more damaging are the indirect costs of financial distress. Some
examples of indirect costs are:
A. loss of current customers.
B. loss of business reputation.
C. management consumed in survival and not on a strategic direction.
D. All of these.
E. Both loss of current customers and loss of business reputation.

*Câu hỏi số 29
Credit scoring models are used by lenders to:
A. determine the borrowers capacity to pay.
B. aid in the prediction of default or bankruptcy.
C. determine the optimal debt equity ratio.
D. Both determine the borrowers capacity to pay and aid in the prediction of default or
bankruptcy.
E. Both determine the borrowers capacity to pay and determine the optimal debt equity ratio.
*Câu hỏi số 30
Altman develop the Z-score model for publicly traded manufacturing firms. Using financial
statement data and multiple discriminant analysis, he found that:
A. in actual use, a Z-score greater than 2.99 meant bankruptcy within one year.
B. in actual use, a Z-score greater than 1.81 implied a 90% chance of bankruptcy within one year.
C. in actual use, a Z-score of less than 1.81 would predict bankruptcy within one year.
D. in actual use, a Z-score less than 2.99 meant non-bankruptcy within one year.
E. None of these.

*Câu hỏi số 31
The key intuition of a Z-score model like Altman's is that:
A. only publicly traded firms can be evaluated.
B. one will be just as well off by guessing on default rates.
C. all corporations will default at least once.
D. financial profiles of bankrupt and non-bankrupt firms are very different one year before
bankruptcy.
E. privately traded firms have better financial information which are disclosed to lenders and need not
rely on any efficient market notions.

*Câu hỏi số 32
Approximately ____ of all firms going through a Chapter 11 bankruptcy successfully
reorganize.
A. 0%
B. 15%
C. 25%
D. 50%
E. 85%

*Câu hỏi số 33
Altman's Z-score predicts the:
A. percentage of payout to equity holders in liquidations.
B. percentage of payout to equity holders in reorganization.
C. likelihood of a private workout.
D. likelihood of bankruptcy of a firm within one year.
E. None of these.

*Câu hỏi số 34
Very small firms (i.e. firms with assets less than $100,000) are more likely to:
A. file for strategic bankruptcy.
B. file for bankruptcy protection earlier than large firms.
C. reorganize than liquidate compared to large firms.
D. liquidate than reorganize compared to large firms.
E. None of these.

*Câu hỏi số 35
A large negative equity position will lead a firm to be more likely to try to:
A. not file bankruptcy.
B. liquidate.
C. reorganize.
D. consolidate.
E. None of these.

*Câu hỏi số 36
Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed
$2 million. Administrative costs of liquidation and wage payments are expected to be $500,000.
A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a
mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale
proceeds. The corporate tax rate is 34%.How much and what percentage of their claim will the
unsecured creditors receive, in total?
A. $100,000; 12.50%
B. $290,909; 36.36%
C. $300,000; 37.50%
D. $600,000; 75.00%
E. Not enough information to answer

Tổng số tiền nợ còn lại sau khi trả $900,000 cho Mortgage secured
= $2,000,000 - $900,000 = $1,100,000
Including:
Mortgage secured claim remaining = $1,200,000 - $900,000 = $300,000 &
Mortgage unsecured claim remaining = $1,100,000 - $300,000 = $800,000)

Net proceeds remaining (after expense & wage & Mortgage secured payment from liquidating
the factory) = $1,800,000 - $900,000 - $500,000 = $400,000.
Mortgage unsecured claim remaining = $2,000,000 - $1,100,000 = $800,000
Unsecured received = ($800,000/$1,100,000)($400,000) = $290,909.09.
%Received = $209,909.09/$800,000 = 36.36%.

*Câu hỏi số 37
Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed
$2 million. Administrative costs of liquidation and wage payments are expected to be $500,000.
A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a
mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale
proceeds. The corporate tax rate is 34%.How much and what percentage of their claim will the
secured creditors receive, in total?
A. $900,000; 75%
B. $981,818; 81.82%
C. $1,009,091; 84.1%
D. $1,200,000; 100%
E. Not enough information to answer.
Mortgage secured claim remaining = $1,200,000 - $900,000 = $300,000.
Mortgage secured payment = ($300,000/$1,100,000)($400,000) = $109,091
Total mortgage secured proceeds = $900,000 + $109,091 = $1,009,09
%received = $1,009,091/$1,200,000 = 84.1%

*Câu hỏi số 38
The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is
based on a going-concern value of $2 million. The proposed financial structure is $750,000 in
new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors,
both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage
lien for $1,500,000 on the factory. The corporate tax rate is 34%.How much should the secured
creditors receive?
A. $1,000,000
B. $1,250,000
C. $1,333,333
D. $1,500,000
E. None of these.
Mortgage lien of $1,500,000

*Câu hỏi số 39
The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is
based on a going-concern value of $2 million. The proposed financial structure is $750,000 in
new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors,
both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage
lien for $1,500,000 on the factory. The corporate tax rate is 34%.How much should the
unsecured creditors receive?
A. $500,000
B. $667,000
C. $750,000
D. $1,000,000
E. None of these.
$2,000,000 - $1,500,000 = $500,000

*Câu hỏi số 40
The management of Magic Mobile Homes has proposed to reorganize the firm. The proposal is
based on a going-concern value of $2 million. The proposed financial structure is $750,000 in
new mortgage debt, $250,000 in subordinated debt and $1,000,000 in new equity. All creditors,
both secured and unsecured, are owed $2.5 million dollars. Secured creditors have a mortgage
lien for $1,500,000 on the factory. The corporate tax rate is 34%.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
E. None of these.
Receive last in priority. Nothing left, therefore $0

*Câu hỏi số 41
The management of Schroeder Books has proposed to reorganize the company. The proposal
is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000
in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All
creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a
mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.How much
should the secured creditors receive?
A. $1,500,000
B. $2,000,000
C. $2,300,000
D. $3,000,000
E. None of these.
Mortgage lien of $2,000,000

*Câu hỏi số 42
The management of Schroeder Books has proposed to reorganize the company. The proposal
is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000
in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All
creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a
mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.How much
should the unsecured creditors receive?
A. $300,000
B. $500,000
C. $1,000,000
D. $2,300,000
E. None of these.
$2,300,000 - $2,000,000 = $300,000

*Câu hỏi số 43
The management of Schroeder Books has proposed to reorganize the company. The proposal
is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000
in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All
creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a
mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%.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
E. None of these.
Receive last in priority. Nothing left, therefore $0

*Câu hỏi số 44
Patricia's Paddle Boats is to be liquidated. All creditors, both secured and unsecured, are
owed $2,100,000. Administrative costs of liquidation and wage payments are expected to be
$750,000. A sale of assets is expected to bring $2,500,000 after taxes. Secured creditors have a
mortgage lien for $1,900,000 on the factory which will be liquidated for $1,200,000 out of the
sale proceeds. The corporate tax rate is 40%.How much and what percentage of their claim will
the unsecured creditors receive, in total?
A. $100,000; 25.00%
B. $122,222; 61.11%
C. $166,666; 77.50%
D. $200,000; 100.00%
E. Not enough information to answer
Mortgage unsecured = $1,900,000 - $1,200,000 = $700,000.
Net proceeds remaining = $2,500,000 - $1,200,000 - $750,000 = $550,000.
Unsecured received = ($200,000/$900,000)($550,000) = $122,222.%
Received = $122,222/$200,000 = 61.11%.

*Câu hỏi số 45
Patricia's Paddle Boats is to be liquidated. All creditors, both secured and unsecured, are
owed $2,100,000. Administrative costs of liquidation and wage payments are expected to be
$750,000. A sale of assets is expected to bring $2,500,000 after taxes. Secured creditors have a
mortgage lien for $1,900,000 on the factory which will be liquidated for $1,200,000 out of the
sale proceeds. The corporate tax rate is 40%.How much and what percentage of their claim will
the secured creditors receive, in total?
A. $900,000; 47.37%
B. $1,250,000; 65.79%
C. 1,627,777; 85.67%
D. $1,900,000; 100%
E. Not enough information to answer.
Mortgage unsecured payment = ($700,000/$900,000)($550,000) = $427,777
Total mortgage proceeds = $1,200,000 + $427,777 = $1,627,77
%received = $1,627,777/$1,900,000 = 85.67%

*Câu hỏi số 46
The management of Patricia's Paddle Boats has proposed to reorganize the firm. The proposal
is based on a going-concern value of $2,100,000. The proposed financial structure is
$1,000,000 in new mortgage debt, $100,000 in subordinated debt and $1,000,000 in new equity.
All creditors, both secured and unsecured, are owed $2,500,000. Secured creditors have a
mortgage lien for $1,300,000 on the factory. The corporate tax rate is 34%.How much should
the secured creditors receive?
A. $100,000
B. $1,000,000
C. $1,100,000
D. $1,300,000
E. None of these.
Mortgage lien of $1,300,000

*Câu hỏi số 47
The management of Patricia's Paddle Boats has proposed to reorganize the firm. The proposal
is based on a going-concern value of $2,100,000. The proposed financial structure is
$1,000,000 in new mortgage debt, $100,000 in subordinated debt and $1,000,000 in new equity.
All creditors, both secured and unsecured, are owed $2,500,000. Secured creditors have a
mortgage lien for $1,300,000 on the factory. The corporate tax rate is 34%.How much should
the unsecured creditors receive?
A. $600,000
B. $667,000
C. $900,000
D. $1,000,000
E. None of these.
$2,100,000 - $1,500,000 = $600,000