Financial Distress

What is the definition of financial distress?

According to the distinction made in the chapter, how is stock-based insolvency different from flow-based insolvency?

Which of the following is an example of asset restructuring, as opposed to financial restructuring, for a firm in financial distress?

What does liquidation of a firm under Chapter 7 of the Bankruptcy Reform Act of 1978 primarily involve?

In a Chapter 7 bankruptcy liquidation, what is the first category of claims to be paid from the proceeds of the liquidated assets?

A company is being liquidated under Chapter 7. Its liquidating value is $10 million. Administrative and other priority costs total $1 million. The firm has $5 million in mortgage bonds secured by a headquarters building, and $8 million in subordinated debentures. The headquarters building is sold for $4 million. According to the Absolute Priority Rule, what is the total amount the mortgage bondholders will receive?

A key difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy is that Chapter 11 focuses on what outcome?

What is a 'prepackaged bankruptcy'?

What is the primary purpose of Altman's Z-score model?

A firm is being evaluated using the revised Z-score model for private firms. It has a Z-score of 1.15. How would this score be interpreted?

Which of the following is a primary reason a firm might choose a private workout over a formal bankruptcy?

What is a 'stalking horse' bidder in the context of a Section 363 bankruptcy?

In a formal Chapter 11 reorganization, the 'debtor in possession' typically refers to which entity?

What is the main benefit of prepackaged bankruptcy compared to a traditional Chapter 11 filing?

According to the text, why might firms with low leverage experience financial distress later but be more likely to be forced into liquidation?

What does the Absolute Priority Rule (APR) state regarding the claims of creditors and shareholders in a bankruptcy liquidation?

In practice, how often is the Absolute Priority Rule (APR) violated in favor of equityholders, according to the evidence cited in the text?

A firm has a going-concern value of $3 million. Its liabilities consist of $1.5 million in mortgage bonds and $2.5 million in subordinated debentures. Its stockholders' equity has a book value of negative $1 million. In a proposed Chapter 11 reorganization, what is the total new claim that would be given to the subordinated debentures?

Which of the following conditions must be met for creditors to file an involuntary bankruptcy petition against a corporation if it has more than 12 creditors?

Historically, what percentage of financial restructurings have been private workouts, according to the research cited in the chapter?

Why do firms that emerge from private workouts tend to experience greater stock price increases than firms emerging from formal bankruptcies?

What is meant by the term 'holdouts' in the context of financial restructuring?

What is the primary function of a bankruptcy trustee in a Chapter 7 liquidation?

What is 'debtor in possession' (DIP) debt?

A manufacturing firm with publicly traded equity has the following ratios: Net working capital/Total assets = -0.061; Accumulated retained earnings/Total assets = -0.626; EBIT/Total assets = -0.318; Market value of equity/Total liabilities = 0.401; Sales/Assets = 1.50. Based on the ratios for bankrupt firms in Table 30.2, what can be concluded?

A company is liquidated with a liquidating value of $2.7 million. Administrative costs and other priority claims total $200,000. Secured mortgage bonds have a claim of $1.5 million, and the building securing them sells for $1 million. Subordinated debentures have a claim of $2.5 million. How much is available to be distributed between the bond and debenture holders after the secured portion is paid?

In a Chapter 11 reorganization, how is a plan of reorganization typically approved by a class of creditors?

What is the primary advantage of a Section 363 bankruptcy over a traditional Chapter 11 filing?

According to the text, under what circumstances might a firm benefit from financial distress?

What does the revised Altman Z-score model use as a proxy for leverage, which is different from the original model?

In the priority of claims under a Chapter 7 liquidation, where do consumer claims rank?

A private company is seeking credit. Its financial data is as follows: Total assets are $1,000,000, EBIT is $100,000, Net working capital is $150,000, Book value of equity is $400,000, Accumulated retained earnings is $200,000, and Total liabilities are $600,000. What is its revised Z-score?

What is the primary reason that equity investors might be able to receive some compensation in a formal bankruptcy, even when the firm is insolvent and the Absolute Priority Rule should leave them with nothing?

A key argument for choosing formal bankruptcy over a private workout is that bankruptcy provides access to what type of special financing?

Which of the five ratios in Altman's original Z-score model is replaced with a different measure in the revised model for private firms?