EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 16QTD
Summary Introduction
To discuss: The way in which statement of bankruptcy reconcile with a management promised to optimize the wealth of shareholders.
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Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac).
8. True or False? Remember to give reasons for your answers!
a) When a company becomes bankrupt, it is usually in the interest of the equity holders to seek a liquidation rather than reorganization.
b) A reorganization plan must be presented for approval by each class of creditor.
c) Canada Revenue Agency has the first claim on the company’s assets in the event of bankruptcy.
d) In a reorganization, creditors may be paid off with a mixture of cash and securities.
e) When a company is liquidated, one of the most valuable assets to be sold is the tax-loss carry-forward.
f) I hired a consultant to prepare a feasibility study of a project, which I am actively considering implementing. I paid the consultant $75,000 to do the study. The fee was quite reasonable. The project involves construction of a building for which I would also need a properly located piece of land. I bought such a piece of land about 10 years ago for the unbelievably low price of 1 million. Lucky…
Which of the following is NOT an effect of the possibility of bankruptcy?
O reduce the possible payoff to stockholders.
increase financial distress costs.
reduce the interest rate on debt.
reduce the current market value of the firm.
Chapter 1 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- 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.)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_forwardHolding everything else constant, which of the following statements is TRUE? * If amendments to the bankruptcy code make bankruptcy less difficult for companies, the average corporation's debt ratio will likely decrease. An rise in the personal tax rate is likely to increase the average corporation's debt ratio. A rise in a company's operating leverage is likely to allow it to use more debt in its capital structure. An rise in the corporate tax rate is likely to allow a company's capital structure to incorporate more debt. Firms with relatively stable assets have relatively low bankruptcy costs, so they use relatively little debt.arrow_forward
- Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs. Topic: Leverage and Capital Structure Question: Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs. (3 to 10 complete sentences)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_forwardWhich 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_forward
- Select the TWO examples of direct bankruptcy costs: Group of answer choices incentive to take on risky projects distribution of funds to stockholders prior to bankruptcy administrative costs of liquidation or reorganization lawyer and accountant fees True/False. The optimal amount of debt produces the highest weighted average cost of capital. Group of answer choices True False In 2021, Google, a company that specializes in internet-related service, acquired Fitbit, the fitness tracking company, to bolster its wearable capabilities. Google paid shareholders $7.25 per share in cash. This is an example of which of the following? Group of answer choices horizontal acquisition conglomerate acquisition vertical acquisition mergerarrow_forwardA friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy: (a) the company debt ratio; (b) the interest coverage; (c) the amount of cash relative to sales or assets; (d) the return on assets; (e) the market-to-book ratio; (f) the recent return on the stock; (g) the volatility of the stock returns. The problem is that she can’t remember whether a high value of each variable implies a high or a low probability of bankruptcy. Can you help her out?arrow_forwardHow does a company maintain liquidity and avoid bankruptcy during a pandemicarrow_forward
- 5. 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_forwardThe main reason that companies declare bankruptcy is: their net worth becomes negative they run out of cash to fund maturing debt their assets are written down they sustain heavy lossesarrow_forwardPlease answer the second question as well please. 2. Identify the key areas of concern if the company fell on hard times and their creditors forced them into bankruptcy. What defenses are available in this situation?arrow_forward
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How Bankruptcy Works; Author: Two Cents;https://www.youtube.com/watch?v=tpI0XWjIsqI;License: Standard Youtube License