Corporate Finance (The Mcgraw-hill/Irwin Series in Finance Insurance and Real Estate)
11th Edition
ISBN: 9781259295881
Author: Ross
Publisher: MCG
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Textbook Question
Chapter 30, Problem 8CQ
Bankruptcy Ethics Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such eases the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?
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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.
Which of the following statements is false?
A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders.
B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default.
C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.
D) If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm.
An investor or creditor believes that they have suffered harm due to the unexpected the bankruptcy of a large corporation:
Required:
Can that investor or creditor sue the auditor of the large corporation under contract law? Explain.
If the investor or creditor chooses to sue the auditor of the large corporation under tort law, what must they prove before their claim can succeed?
How can the auditor contest a claim of negligence?
Chapter 30 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance Insurance and Real Estate)
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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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What are the objectives of the bankruptcy laws in the United States? a. Provide relief for the court system and ensure that all debtors are treated the same. b. Distribute assets fairly and discharge honest debtors from their obligations. c. Protect the economy and stimulate growth. d. Prevent insolvency and protect shareholders.arrow_forwardPlease explain in detail. . Unsecured creditors: have rights to be paid amounts owed, but the rights may have to be enforced through the courts face significant risk, and accordingly unsecured credit is very unusual have no rights in the event that the debtor defaults only have the recourse of severing business ties with the defaulting debtorarrow_forwardDo some states allow creditors to engage in deception with the debtor to obtain the collateral if there has been a default? (Yes/No, deception is never allowed to be used by a creditor) Is a secured party allowed to be paid (reimbursed) for the costs of collection before it applies funds collected to the unpaid balance of a loan? (Yes/No collected funds must first be used to - pay off the debt owed to the creditor) If a debtor files for bankruptcy, does that stop any and all collection efforts of a creditor? ______ (Yes to unsecured creditors but no for secured creditors / Yes to all creditors, both secured and unsecured / No, bankruptcy does not affect a creditor's right to collection of an unpaid debt)arrow_forward
- Choose the correct. What are the objectives of the bankruptcy laws in the United States?a. Provide relief for the court system and ensure that all debtors are treated the same.b. Distribute assets fairly and discharge honest debtors from their obligations.c. Protect the economy and stimulate growth.d. Prevent insolvency and protect shareholders.arrow_forwardGeddes 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…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_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_forward5. Which of the following statements is FALSE? a. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy. b. Equity holders expect to receive dividends and the firm is legally obligated to pay them. c. A firm that fails to make the required interest or principal payments on the debt is in default. d. After a firm defaults, debt holders are given certain rights to the assets of the firm.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
- Sell-Soft is the defendant in numerous lawsuits claiming unfair trade practices. Sell- Soft has strong incentives not to disclose these contingent liabilities. However, GAAP requires that companies report their contingent liabilities. Requirements Why would a company prefer not to disclose its contingent liabilities? Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities. What ethical tightrope must companies walk when they report contingent liabilities?arrow_forwardExplain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs.arrow_forwardWhen a defendant debtor in a lawsuit is said to be “judgement proof” it signifies Multiple Choice The debtor has no assets which are collectable. The creditor has no assets to pursue judicial actions. The creditor committed fraud in the judicial process and therefore will not be successful. Clearly the defendant is not at fault for the debt. A petition for bankruptcy that is filed by creditors against a debtor is known as Multiple Choice a recovery action. a voluntary bankruptcy. an involuntary bankruptcy. an order for relief. A trust is a __________-party fiduciary relationship. Multiple Choice eleven three two sixarrow_forward
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