Question 1

A debt-for-equity swap occurs when creditors surrender a portion of their claims on the firm in exchange for an ownership position in the firm.

Accepted Answer

A debt-for-equity swap is a debt restructuring strategy where creditors agree to convert all or a portion of the outstanding debt into equity in the company. In this way, the creditors become shareholders and can participate in the firm's growth and profitability.

Question 2

By law,corporate liquidation can only be conducted outside of the U.S.bankruptcy court.

Accepted Answer

Corporate liquidation can be conducted through a Chapter 7 bankruptcy filing in the U.S. bankruptcy court.

Question 3

Reforms in creditor rights tend to increase the availability and reduce the cost of credit in countries where court enforcement is quick and fair.

Accepted Answer

Reforms in creditor rights provide more security for lenders, which increases their willingness to lend and reduces the interest rates they charge. Quick and fair court enforcement allows lenders to more easily recover their money in case of default, further increasing their willingness to lend and reducing the cost of credit.

Question 4

Credit ratings provided by Moody's and Standard & Poor's are highly reliable indicators of a firm's degree of financial distress.

Accepted Answer

Credit ratings from Moody's and Standard & Poor's provide an assessment of credit risk but are not infallible predictors of financial distress. They are based on available information and subjective judgments, and there have been instances where firms experienced financial distress or defaulted despite having high credit ratings.

Question 5

The term financial distress could apply to a firm unable to meet its obligations or to a specific security on which the issuer has defaulted.

Accepted Answer

Financial distress can refer to both a company that is unable to meet its financial obligations and a security where the issuer has defaulted on its payments.

Question 6

If a creditor is owed a large amount of money,it could become a major or even the controlling shareholder in the reorganized firm.

Accepted Answer

If a creditor is owed a large amount of money, they may exchange their debt for equity in the reorganized firm, which means they could become a major or even controlling shareholder.

Question 7

Increasingly,distressed companies are choosing to restructure inside of bankruptcy court,rather than reaching a general agreement with creditors before seeking Chapter 11 protection.

Accepted Answer

The answer of Increasingly,distressed companies are choosing to restructure inside...

Question 8

For capital markets to function smoothly,disputes involving the legal rights of all participants (both debtors and creditors)need to be resolved quickly and equitably by the courts.

Accepted Answer

Resolving disputes quickly and equitably is crucial for maintaining the trust and confidence among all participants in the capital markets. This helps to ensure a fair and transparent environment for investment and financing activities, which in turn promotes economic growth and stability. Failure to resolve disputes in a timely and fair manner can lead to market uncertainty, increased costs, and reduced investor confidence, which may ultimately hinder the functioning of capital markets.

Question 9

Financially distressed firms also affect communities in which they are located in terms of increasing unemployment and eroding the tax base.

Accepted Answer

Financially distressed firms often have to lay off employees or shut down completely, leading to a rise in unemployment in the community. Additionally, they may not be able to pay taxes or contribute to the local economy, which can erode the tax base and have a negative impact on community services and infrastructure.

Question 10

A firm is said to be bankrupt once it defaults on a bond payment.

Accepted Answer

A firm's financial state is determined through several factors, including cash flow, debt-to-equity ratio, and profitability. Bankruptcy occurs when a company can no longer meet its financial obligations and becomes insolvent. Defaulting on a bond payment is one indication of financial distress, but it may not necessarily lead to bankruptcy.

Question 11

A composition is an agreement in which creditors agree to settle for less than the full amount they are owed.

Accepted Answer

A composition is a type of agreement where creditors agree to accept a lesser amount than what they are owed in order to settle a debt.

Question 12

A firm is said to be technically solvent when it is unable to pay its liabilities as they come due.

Accepted Answer

The answer of A firm is said to be technically...

Question 13

A workout is an arrangement conducted inside of bankruptcy court by a debtor and its creditors for payment or re-scheduling of payment of the debtor's obligations.

Accepted Answer

A workout refers to a private negotiation outside of bankruptcy court between a debtor and its creditors for the restructuring or repayment of the debtor's obligations, not a process conducted within the court.

Question 14

Large companies often have a difficult time achieving out-of-court settlements because they usually have hundreds of creditors.

Accepted Answer

Large companies typically have a complex web of creditors, which can make it difficult to reach an agreement through negotiations. As a result, many large companies end up having to go through bankruptcy proceedings in order to settle their debts.

Question 15

A debt extension occurs when creditors agree to lengthen the period during which the debtor firm can repay its debt.

Accepted Answer

A debt extension is an agreement between creditors and a debtor firm to extend the repayment period of the debt. This allows the debtor firm to have more time to generate revenue and pay back the debt without defaulting.

Question 16

Bankruptcy is a state-level legal proceeding designed to protect the technically or legally insolvent firm from lawsuits by its creditors until a decision can be made to shut down or to continue to operate the firm.

Accepted Answer

Bankruptcy is a federal-level legal proceeding in the United States, not state-level, although state laws can influence certain aspects of the bankruptcy process.

Question 17

A debt-for-equity swap occurs when the distressed firm's shareholders are willing to surrender a portion of their ownership for debt in the firm.

Accepted Answer

In a debt-for-equity swap, it is the creditors or debt holders who agree to cancel some or all of the debt in exchange for equity (ownership) in the company, not the shareholders surrendering ownership for debt.

Question 18

The debtor firm often initiates the voluntary settlement process,because it generally offers the best chance for the current owners to recover a portion of their investments either by continuing to operate the firm or through a planned liquidation of the firm.

Accepted Answer

This statement correctly describes the motivation behind debtor-initiated voluntary settlements, which aim to preserve some value for the current owners/investors of the firm, compared to alternative options such as bankruptcy or foreclosure.

Question 19

Legal insolvency occurs when a firm's liabilities exceed the book value of its assets.

Accepted Answer

The answer of Legal insolvency occurs when a firm's liabilities...

Question 20

A firm is not bankrupt or in bankruptcy until it files or its creditors file a petition for reorganization or liquidation with the federal bankruptcy courts.

Accepted Answer

A firm officially becomes bankrupt only when it files for bankruptcy or when its creditors file a petition for reorganization or liquidation with the federal bankruptcy courts. Until then, it may be experiencing financial difficulties but it is not considered legally bankrupt.

Quiz 17: Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation