Chapter 13 Fin 3060

In the process of liquidation, some types of claims receive preference over other claims. Which one of the following determines which type of claim is paid first?

B. Absolute priority rule

Which one of the following statements is correct?

B. Bankruptcy courts have "cram-down" powers.

Which one of the following is the equity risk arising from the capital structure selected by the firm?

B. Financial risk

Which of the following statements correctly relate to M&M Proposition I, with taxes? I. Debt decreases the value of a firm. II. The levered value of a firm exceeds the firm's unlevered value. III. The weighted average cost of capital (WACC) is constant. IV. The optimal capital structure is zero debt.

B. II only

Which of the following is a direct bankrupt cost?

B. Legal and accounting fees related to a bankruptcy proceeding

Which one of the following is a key provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

B. Right granted to creditors to file their own reorganization plan once a firm is in bankruptcy for 18 months

Which one of the following is minimized when the value of the firm is maximized?

B. WACC

The level of financial risk to which a firm is exposed is dependent upon the firm's:

B. debt-equity ratio.

A prepack:

B. is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.

Which one of the following best defines legal bankruptcy?

C. A legal proceeding for liquidating or reorganizing a business

Which one of the following supports the theory that the value of a firm increases as the firm's level of debt increases?

C. M&M Proposition I, with taxes

Which one of the following states that a firm's cost of equity capital is a positive linear function of the firm's capital structure?

C. M&M Proposition II

Peterboro recently defaulted on a bank loan. To avoid a bankruptcy proceeding, the bank agreed to a composition. This composition would do which one of the following?

C. Reduce the amount of the loan payments so Peterboro can pay timely

Which one of the following is correct based on the static theory of capital structure?

C. The costs of financial distress decrease the value of a firm.

When is a firm insolvent from an accounting perspective?

C. When the firm has a negative net worth

M&M Proposition II, without taxes, states that the:

C. cost of equity increases as a firm increases its debt-equity ratio.

The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as:

C. homemade leverage.

The static theory of capital structure assumes a firm:

C. is fixed in terms of its assets.

You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm:

C. whenever EBIT exceeds $428,000.

Which one of the following statements concerning financial leverage is correct?

D. Financial leverage magnifies both profits and losses.

Which one of the following is an example of a direct bankruptcy cost?

D. Incurring legal fees for the preparation of bankruptcy filings

Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship?

D. Interest tax shield

Which one of the following statements is the core principle of M&M Proposition I, without taxes?

D. The capital structure of a firm is totally irrelevant.

Which one of the following statements matches M&M Proposition 1?

D. The value of a firm is independent of the firm's capital structure

Which one of the following conditions exists at the point where a firm maximizes its value?

D. WACC is minimized.

T.L. C. Enterprises just revised its capital structure from a debt-equity ratio of 0.30 to a debt-equity ratio of 0.45. The firm's shareholders who prefer the old capital structure should:

D. sell some shares and loan out the sale proceeds.

Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process. Which one of the following terms best applies to this situation?

E. Reorganization

Which one of the following is the theory that a firm should borrow up to the point where additional tax benefit from an extra dollar of debt equals the additional costs associated with financial distress from the additional debt?

E. Static theory of capital structure

Which one of the following represents the present value of the interest tax shield?

E. TC × D

Which one of the following is an implication of M&M Proposition II, without taxes?

E. The risk of equity depends on both the degree of financial leverage and the riskiness of the firm's operations.

Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms?

E. The unlevered firm will have higher EPS at relatively low levels of EBIT.

Which one of the following terms is inclusive of both direct and indirect bankruptcy costs?

A. Financial distress costs

Which of the following will increase the value of a levered firm according to M&M Proposition I, with taxes? I. decrease in the amount of the debt II. increase in the value of the unlevered firm III. decrease in the tax rate IV. increase in the interest rate on the debt

A. II only

Which one of the following terms applies to the costs incurred by a firm which is trying to avoid filing for bankruptcy?

A. Indirect bankruptcy costs

Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:

A. a firm's value and its weighted average cost of capital are inversely related.

Which one of the following statements related to the static theory of capital structure is correct?

D. A firm's value is maximized when a firm operates at its optimal debt level.

Which one of the following statements concerning financial leverage is correct?

D. Changes in the capital structure of a firm will generally change the firm's earnings per share.

Which one of the following statements is correct?

E. A firm can file for Chapter 11 bankruptcy even if the firm is solvent.

Which one of the following will generally receive the highest priority in a bankruptcy liquidation, assuming the absolute priority rule is followed?

E. Bankruptcy administrative expenses

Which one of the following is the equity risk arising from the daily operations of a firm?

E. Business risk

Which one of the following terms refers to the termination of a firm as a going concern?

E. Liquidation