978-1337902571 Test Bank Web Appendix 07C Bankruptcy And Reorganization

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Web Appendix 07C: Bankruptcy and Reorganization

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1. Chapter 7 of the Bankruptcy Act is designed to do all of the following EXCEPT:

a. Provides safeguards against the withdrawal of assets by the owners of the bankrupt firm.

b. Allows insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior

debt.

c. Provides for an equitable distribution of the assets among the creditors.

d. Details the procedures to be followed when a firm is liquidated.

e. Establishes the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet

debt payments.

2. Which of the following statements is most CORRECT?

a. Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.

b. Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed

solely by state laws.

c. All bankruptcy petitions are filed by creditors seeking to protect their claims on firms in financial distress. Thus, all

bankruptcy petitions are involuntary as viewed from the perspective of the firm’s management.

d. Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a

reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter

7 of the Act.

e. “Restructuring” a firm’s debt can involve forgiving a certain portion of the debt but does not involve changing the

debt’s maturity or its contractual interest rate.

3. Which of the following statements is most CORRECT?

Web Appendix 07C: Bankruptcy and Reorganization

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a. The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.

b. The basic doctrine of fairness states that all debt holders must be treated equally.

c. Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the

“public interest” is not a relevant concern.

d. While the firm is in bankruptcy, the existing management is always allowed to remain in control of the firm,

though the court monitors its actions closely.

e. To a large extent, the decision to dissolve a firm through liquidation or to keep it alive through reorganization

depends upon the value of the firm if it is rehabilitated versus its value if its assets are sold off individually.

4. What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the

Bankruptcy Act?

1. Trustees’ costs to administer and operate the firm.

2. Common stockholders.

3. General, or unsecured, creditors.

4. Secured creditors who have claim to the proceeds from the sale of a specific property pledged for a mortgage.

5. Taxes due to federal and state governments.

a. 1, 4, 3, 5, 2

b. 5, 4, 1, 3, 2

c. 4, 1, 5, 3, 2

d. 5, 1, 4, 2, 3

e. 1, 5, 4, 3, 2

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