CORPORATE FINANCE(LL)
11th Edition
ISBN: 9781260430011
Author: Ross
Publisher: MCG
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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
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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.
Select 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.
Chapter 17 Solutions
CORPORATE FINANCE(LL)
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
Ch. 17 - Firm Value Janetta Corp. has EBIT of 5850,000 per...Ch. 17 - Agency Costs Tom Scott is the owner, president and...Ch. 17 - Nonmarketed Claims Dream, Inc., has debt...Ch. 17 - Prob. 4QPCh. 17 - Capital Structure and Growth Edwards Construction...Ch. 17 - Prob. 6QPCh. 17 - Agency Costs Fountain Corporations economists...Ch. 17 - Financial Distress Good Time Company is a regional...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - Personal Taxes, Bankruptcy Costs, and Firm Value...Ch. 17 - What is the expected value of the company in one...Ch. 17 - Prob. 2MCCh. 17 - One year from now, how much value creation is...Ch. 17 - Prob. 4MCCh. 17 - Prob. 5MCCh. 17 - Prob. 6MC
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- 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_forwardChoose the correct. What is a cram down?a. An agreement about the total amount of money to be reserved to pay creditors who have priority.b. The bankruptcy court’s confirmation of a reorganization even though a class of creditors or stock-holders did not accept it.c. The filing of an involuntary bankruptcy petition, especially by the holders of partially secured debts.d. The court’s decision as to whether a particular creditor has priority.arrow_forwardExplain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs. Topic: Leverage and Capital Structure Question: Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs. (3 to 10 complete sentences)arrow_forward
- Please 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_forwardExplain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs.arrow_forwardWhich one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated? Select one: a.Federal income taxes payable b.Loans made to the company by its stockholders c.Employees' claims for salaries d.Claims for expenses of administering the bankruptcy e.Bank loansarrow_forward
- What is a cram down?a. An agreement about the total amount of money to be reserved to pay creditors who have priority.b. The bankruptcy court’s confirmation of a reorganization even though a class of creditors or stockholders did not accept it.c. The filing of an involuntary bankruptcy petition, especially by the holders of partially secured debts.d. The court’s decision as to whether a particular creditor has priority.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_forwardWhat are some situations other than immediate financial distressthat lead firms to file for bankruptcy?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_forwardWhich 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_forwardChoose the correct. What accounting is made for professional fees incurred during a bankruptcy reorganization?a. They must be expensed immediately.b. They must be capitalized and written off over 180 months or less.c. They must be capitalized until the company emerges from the reorganization.d. They are either expensed or capitalized, depending on the nature of the expenditure.arrow_forward
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