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Solutions to Web Appendix 7B

Solutions to Web Appendix 7B - AnswerstoQuestions...

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Web Appendix 7B Bankruptcy and Reorganization Answers to Questions 7B-1 The following central issues arise in bankruptcy proceedings: 1. Does the firm’s  inability to meet scheduled payments result from a temporary cash flow  problem, or does it represent a permanent problem caused by asset values having fallen below  debt obligations? 2. If the problem is a temporary one, then an agreement that stretches out payments may be worked  out to give the firm time to recover and to satisfy everyone.  However, if basic long-run asset values  have truly declined, economic losses will have occurred.  In this event, who should bear the losses? 3. Is the company “worth more dead than alive”—that is, would the business be more valuable if it  were maintained and continued in operation or if it were liquidated and sold off in pieces? 4. Who should control the firm while it is being liquidated or rehabilitated?   Should the existing  management be left in control, or should a trustee be placed in charge of operations? 7B-2 Chapters 11 and 7 are the most important ones for financial management purposes.  Chapter 11 is  the business reorganization chapter—this means that the company is bankrupt and is trying to  reorganize under Chapter 11 of the Bankruptcy Act.  If a reorganization plan cannot be worked out,  then the company will be liquidated as prescribed in Chapter 7 of the Act. 7B-3 a. False; Chapter 7 provides safeguards against the withdrawal of assets by the owners of the  bankrupt firm. b. False; Chapter 11 establishes the rules of reorganization for firms with projected cash flows that  eventually will be sufficient to meet debt payments.
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