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Exam 22: Bankruptcy, Reorganization, and Liquidation

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Question 1

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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.
B) The basic doctrine of fairness states that all debtholders 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 a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
E) To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.

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Question 2

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The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.

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Question 3

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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 is the highest claim, 5 is the lowest. (1) (2) (3) (4) (5) Taxes due to federal and state governments.

Chapter 7 of the Bankruptcy Act is designed to do which of the following?

The primary test of feasibility in a reorganization is whether the firm's fixed charges after reorganization can be covered by its projected cash flows.

One of the actions that can be taken in bankruptcy under the standard of feasibility is to replace existing management with a new team if the quality of management is judged to have been substandard.

Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments, a bankruptcy case cannot begin until the firm actually defaults on a scheduled payment.

A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.

Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.

Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.

Which of the following statements is most CORRECT?

In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants.