CORPORATE FINANCE ACCESS CARD
12th Edition
ISBN: 2810023360184
Author: Ross
Publisher: MCG
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Textbook Question
Chapter 30, Problem 10CQ
Bankruptcy versus Private Workouts Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?
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What are some situations other than immediate financial distressthat lead firms to file for bankruptcy?
Bankruptcy 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? Discuss
What affect would an increase in the costs of bankruptcy have on the capital structure of a firm?
Question 4 options:
Higher bankruptcy costs make debt less expensive, so firms will use more debt and less equity.
Higher bankruptcy costs make debt more expensive, so firms will use less debt and more equity.
Bankruptcy costs have no impact on the capital structure decision.
Chapter 30 Solutions
CORPORATE FINANCE ACCESS CARD
Ch. 30 - Prob. 1CQCh. 30 - Prob. 2CQCh. 30 - Prepackaged Bankruptcy What is prepackaged...Ch. 30 - Prob. 4CQCh. 30 - Prob. 5CQCh. 30 - APR What is the absolute priority rule?Ch. 30 - DIP Loans What are DIP loans? Where do DIP loans...Ch. 30 - Bankruptcy Ethics Firms sometimes use the threat...Ch. 30 - Bankruptcy Ethics Several firms have entered...Ch. 30 - Bankruptcy versus Private Workouts Why do so many...
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- Explain 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_forwardWhy are creditors willing to negotiate with you? It's fun. o They lose more by negotiating with you than if you go into bankruptcy. They lose less by negotiating with you than if you go into bankruptcy. They're required to do so.arrow_forwardWhich of the following is NOT an effect of the possibility of bankruptcy? O reduce the possible payoff to stockholders. increase financial distress costs. reduce the interest rate on debt. reduce the current market value of the firm.arrow_forward
- Indirect 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_forwardWhat affect would an increase in the cost of bankruptcy have on the capital structure of a firm? Question 10 options: Bankruptcy costs have no impact on the capital structure of firms Business risk will increase, so firms will use more debt and less equity Debt will become less expensive, so firms will use more debt and less equity Debt will become more expensive, so firms will use less debt and more equityarrow_forwardExplain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.arrow_forward
- 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_forwardWhich of the following terms refer to the situation in which a firm has negative net worth? Multiple Choice Legal bankruptcy. Liquidation. Accounting insolvency. Technical insolvency. Business failure.arrow_forwardHow can a company use a bankruptcy to abrogatelabor contracts? Has this occurred in certain industries in recent years?arrow_forward
- In case of bankruptcy: Preferred shareholders get their money first, then creditors, common shareholders are the last group to get their money back Bondholders get their money first, then preferred shareholders, common shareholders are the last group to get their money back Preferred shareholders get their money first, then banks, common shareholders are the last group to get their money back None of the abovearrow_forward30. 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_forward3. Compare and contrast operating leverage vs. financial leverage.4. What are the factors that will affect break-even and explain a circumstance of how it would affect your decision-making?5. Discuss a warning sign that could result in bankruptcy (either personal or for a business), and what you would do to fix the problem?arrow_forward
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