Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 17, Problem 10CQ
Summary Introduction
To analyze: The given situation.
Bankruptcy:
Bankruptcy is lawful proceedings which involve business or individual who are unable to repay debts that are outstanding.
Information: CT Airlines filed for bankruptcy, at least in part, as means of minimizing labour rates.
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Students have asked these similar questions
Geddes Ltd. Is not able to pay its debts when required, but it wants to prevent bankruptcy and continue to carry on business. Geddes Ltd. should consider .
voluntarily assigning its assets to a trustee in bankruptcy
petitioning for a receiving order
making a proposal to its creditors
avoiding creditors until it returns to financial health
In which of the following circumstances will bankruptcy occur : (select all that applies)
When the single largest creditor or group of creditors indicates their desire that bankruptcy should occur.
When a voluntary assignment is made.
None of the answers is correct.
When a financial arrangement with trade creditors is not approved by the court
Clark starts a music store called Megamax. The store specializes in popular music for teenagers. Later, Judy also sets up her own music store and calls it Maganax. To protect his trademark, Clark may
register…
Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs.
Differentiate between various forms of bankruptcy and restructuring that the clients should understand.
1. Summarize the key points of interest if the company fell on hard times and had to file voluntary bankruptcy. What ethical implications
should be considered when debating whether or not to file bankruptcy?
2. Identify the key areas of concern if the company fell on hard times and their creditors forced them into bankruptcy. What defenses are
available in this situation?
3. Illustrate hypothetical calculations that would be done to help creditors understand how much money they might receive if the company
were to liquidate. Ensure all information is entered accurately. Refer to the illustration (Exhibit 13.2) in your textbook to view potential
calculations.
Chapter 17 Solutions
Corporate Finance
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
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- Which of the following statements regarding bankruptcy is not true? A. Companies can be forced into involuntary bankruptcy by the creditors. B. Companies cannot be forced into involuntary bankruptcy by the creditors. C. Bankruptcy can result in a company liquidating its assets with the distribution of those proceeds to creditors. D. Bankruptcy can result in financial reorganization and continued existence.arrow_forwardIndirect bankruptcy costs include all of the following, except: Multiple Choice O The costs of departing employees. The shareholders taking over management of the firm. O High value projects are put on hold. Profitable investments are postponed. Management is distracted from operating the business.arrow_forwardPlease answer the second question as well please. 2. Identify the key areas of concern if the company fell on hard times and their creditors forced them into bankruptcy. What defenses are available in this situation?arrow_forward
- What are some situations other than immediate financial distressthat lead firms to file for bankruptcy?arrow_forwardBankruptcy issues: 1. Why do creditors accept a plan for financial rehabilitation rather than demand liquidation of business? 2. Would it be a sound rule liquidate whenever the liquidation value above the value of a corporation is a going concern? Discussarrow_forwardTebonManufacturing is considering seeking relief under Chapter 7 of the Bankruptcy Code. However, the company would prefer to engage in out-of-court activities that would allow for a restructuring of debts in an orderly manner. Before approaching its creditors, the company is attempting to estimate the amount of consideration that would be received by various classes of creditors if the company did liquidate. The company’s assets and liabilities are as follows:(attached)Of the accounts payable, $130,000 is secured by inventory which has a net realizable value of $150,000. Note A is secured by the balance of the inventory and receivables. Note B is secured by equipment with a net realizable value of $300,000, and the mortgage payable and accrued interest are secured by the land. All of the other liabilities are unsecured, although $10,000 is unsecured with priority over the balance.Prepare a schedule that sets forth the classes of claims (fully secured, partially secured, unsecured) and…arrow_forward
- Choose the correct. An order for relief creates an automatic stay that:a. Prohibits creditors from taking action to collect from an insolvent company without court approval.b. Calls for the immediate distribution of free assets to unsecured creditors.c. Can be entered only in an involuntary bankruptcy proceeding.d. Gives an insolvent company time to file a voluntary bankruptcy petition.arrow_forwardMatmart Corporation is contemplating seeking a voluntary liquidation of the Bankruptcy Reform Act. There are a large number of partially secured creditors who are opposed to the possibility of a liquidation and favor a restructuring of their debt, which will allow the corporation to return to profitability and positive operating cash flows. Values relevant to a possible liquidation are as follows: BookValue EstimatedNet RealizableValue Free assets consisting of cash, receivables, and securities. Inventory Equipment (net) Land. Buildings (net) Goodwill Total assets Accounts payable Note payable Accrued interest on mortgage payable Mortgage payable Unsecured creditors with priority. Total liabilities $ 125,000 420,000 180,000 300,000 1,200,000 300,000 $2,525,000 $ 340,000 600,000 24,000 1,000,000 70,000 $2,034,000 $ 85,000 330,000 120,000 350,000 1,000,000 $1,885,000 Of the net realizable value of inventory, $200,000 is pledged against $250,000 of accounts…arrow_forwardSelect only the false statement below: a. Because many aspects of the bankruptcy process are independent of the size of the firm, the costs are typically higher, in percentage terms, for smaller firms. b. Aside from the direct legal and administrative costs of bankruptcy, many other indirect costs are associated with financial distress (whether or not the firm has formally filed for bankruptcy). c. Although indirect costs of bankruptcy are difficult to measure accurately, they are typically much smaller than the direct costs of bankruptcy. d. Bankruptcy protection can be used by management to delay the liquidation of a firm that should be shut down.arrow_forward
- 30. Which of the following are true about bankrupt firms in reorganization? A. They may cancel their collective bargaining agreements B. They must settle liabilities for full face value C. They must fund all pension plans in full D. They lose their tax loss carryforwards E. All of the above 31. Which of the following claims has priority in a Chapter 7 bankruptcy? A. Claims of unsecured creditors B. Taxes legally due and owed C. Unsecured customer deposits, not to exceed $900 each D. Wages of not more than $2,000 per worker E. All of the above have equal priority 32. Microsoft Corp has an Altman’s Z score of 12.8. How likely is the company to go bankrupt? A. Highly probable B. Unsure C. Unlikely D. Insufficient information E. None of the above 33. Honkaby Service Inc has a Working Capital/Total Assets ratio of 0.2, a Retained Earnings/Total Assets Ratio of 0.1, an EBIT/Total Assets ratio of 0.25, a Market value of equity/Book value of total liabilities ratio of 0.6, and a…arrow_forwardList five factors that may indicate that a client may not remain a going concern, for each indications all the degree of subjectivity and judgement that would in fact results in the company's going bankrupt.arrow_forwardManagement, the board of directors and creditors are working to avoid a bankruptcy situation for a firm. If they believe the firm's problems are temporary, which of the following should they consider before entering into any short-term restructuring arrangement? Whether existing management or a special trustee should be in charge during the restructuring Whether the value to shareholders could be increased by selling the firm in pieces Whether the long-term value of the firm will be impacted Whether a formal or informal filing will be requiredarrow_forward
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