1. Chapter 7 of the Bankruptcy Act is designed to do which of the following?
a. Protect shareholders against creditors.
b. Establish the rules of reorganization for firms with projected cash flows that eventually will be
sufficient to meet debt payments.
c. Ensure that the firm is viable after emerging from bankruptcy.
d. Allow the firm to negotiate with each creditor individually.
e. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and
allow insolvent debtors to discharge all of their obligations and to start over unhampered by a
burden of prior debt.
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 against 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 it cannot call
for changing the debt's maturity or its contractual interest rate.
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.
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