WEB APPENDIX 07C—BANKRUPTCY AND REORGANIZATION
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.
e
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7C Bankruptcy and Reorganization
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Liquidation procedures
Multiple Choice: Conceptual
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.
d
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7C Bankruptcy and Reorganization
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Bankruptcy law
Multiple Choice: Conceptual
3. Which of the following statements is most CORRECT?
a.
The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization
plan.
WEB APPENDIX 07C—BANKRUPTCY AND REORGANIZATION
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.
1
7C Bankruptcy and Reorganization
FOFM.BRIG.16.07.07C – Bankruptcy and Reorganization
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Bankruptcy issues
Multiple Choice: Conceptual
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?
Trustees’ costs to administer and operate the firm.
Common stockholders.
General, or unsecured, creditors.
Secured creditors who have claim to the proceeds from the sale of a specific property
pledged for a mortgage.
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
1
7C Bankruptcy and Reorganization
FOFM.BRIG.16.07.07C – Bankruptcy and Reorganization
United States – BUSPROG.FOFM.BRIG.16.06 – Reflective thinking
United States – OH – DISC.FOFM.BRIG.16.01 – Stocks and bonds
Priority of claims
Multiple Choice: Conceptual