PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 32, Problem 9PS
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To determine: Why there is a positive value for equity when the companies file for bankruptcy.
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Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs.
Indicate whether the following statement is true or false.Provide the relevant explanations.
In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)
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- 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? Discussarrow_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_forwardIndicate whether each of the following statements is true or false. Support your answers with the relevant explanations. In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forward
- Which 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_forwardBriefly describe bankruptcy law. If a firm wereto default on its bonds, would the company beliquidated immediately? Would the bondholdersbe assured of receiving all of their promisedpayments?arrow_forwardIf someone owes you money, that person or business goes into bankruptcy why would it make a difference if you were a secured or unsecured creditor ?arrow_forward
- . Is bankruptcy a fairly common occurrence amonglarge companies, or is it restricted primarily to smallfirms?arrow_forwardHow does a firm formally declare bankruptcy?arrow_forwardWhat 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.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_forwardWhich statement is FALSE regarding the difference between shareholders and bondholders? * Bondholders are mere creditors of the company to whom the company has to repay a certain amount. Shareholders are the real owners in the company. Shareholders have more rights (voting rights, priority at times of bankruptcy, payment preferences) than bondholders. Shareholders are more exposed to risks than bondholders.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
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