Chapter 32 - Corporate Restructuring
Chapter 32 Corporate Restructuring Multiple Choice Questions
1. The following are some of the ways in which a company structure can be modified: I) LBOs II) Privatizations III) Spin-offs and carve-outs IV) Bankruptcies A. I and II only B. II only C. I and III only D. I, II, III, and IV
2. Leveraged buyouts (LBOs) almost always involve: I) a large part of the purchase price is financed mostly by debt II) most of this debt is below investment grade (junk) III) the firm goes private and its shares are no longer traded on the open market A. I only B. II only C. III only D. I, II, and III
3. When a leveraged buyout transaction is led by the firm's management then the transaction is called: A. IPO B. MBO C. MOBL D. CFO
4. The largest and best documented LBO of the 1980s is the: A. KKR acquiring RJR Nabisco through LBO B. Thompson Co acquiring Southland (7-11) through LBO C. KKR acquiring Beatrice through LBO D. None of the above
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Chapter 32 - Corporate Restructuring
5. The following are examples of LBOs except: A. KKR and RJR Nabisco B. America Online and Time Warner C. KKR and Beatrice D. Thompson and Southland
6. The following are examples of LBOs except: A. KKR and Safeway B. KKR and Owens-Illinois C. Fiat and Chrysler D. All of the above are LBOs
7. In 1991 RJR: A. reverted to being a public company B. went bankrupt because of the high debt burden C. stake held by KKR was completely sold off D. all of the above
8. Largest gainers from LBOs were: A. Junk bond holders B. Raiders C. Selling stockholders D. Investment banking firms
9. Junk bonds are bonds with: A. AAA or Aaa ratings B. BBB or Baa ratings C. BB or Ba ratings or lower D. D rated bonds
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10. The main characteristics of LBOs are: A. High debt B. Private ownership C. Management incentives D. All of the above
11. The gains from LBOs are from: A. Tax savings because of high debt servicing B. Loss in the value to bondholders C. Improved performance because of incentives to mangers and employees D. All of the above
12. In the case of RJR Nabisco LBO, the gain in market value RJR stockholders were several times more than: A. estimated value of additional interest tax shields generated by the LBO B. estimated losses to RJR bondholders as result of drastic decline in bond ratings C. (A) and (B) combined D. none of the above
13. The main characteristics of leveraged restructuring are: I) High debt II) Management incentives III) Private ownership A. I only B. I and II only C. I and III only D. I, II, and III
14. Leveraged restructurings are designed to force mature, successful but overweight firms to: A. reduce cash B. reduce operating costs C. use assets more efficiently D. all of the above
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15. The following are examples of spin-offs except: A. Abbot Laboratories and Hospira B. AT&T and Lucent C. General Motors and EDS D. Exxon and Mobil
16. In case of spin-offs: A. Shares of the new company are given to shareholders of the parent company B. Shares of the new company are sold as a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above
17. Spin-offs are not taxed if the shareholders of the parent company are given at least: A. 90% of the shares in the new company B. 80% of the shares in the new company C. 70% of the shares in the new company D. 60% of the shares in the new company
18. A spin-off is a/an I) new company. II) independent company. III) company formed by detaching part of a parent firm's assets and operations. A. I only B. II only C. I and II only D. I, II and III
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19. The following are advantages of spin-offs: I) they widen investor choice by allowing them to invest in just one part of the business. II) they can improve incentives for managers. III) by spinning of businesses with "poor fit" parent firms can concentrate on its main activities. IV) they relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another. A. I and II only B. I, II and III only C. I, II, III and IV D. III and IV only
20. In case of carve-outs: A. Shares of the new company are given to the shareholders of the parent company B. Shares of the new company are sold in a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above
21. The following are examples of carve-outs except: A. Bristol Myers Squibb and Mead Johnson Nutrition B. 3Com and Palm C. AT&T and Lucent D. All of the above are examples of carve-outs
22. Which of the following statements regarding spin-offs and carve-outs is not true? A. Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B. Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C. Gains or losses from carve-outs are taxed at the corporate tax rate D. In Carve-outs, parent company has the majority control
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23. Asset sales are: I) Good news for investors in the selling firm II) On average the assets are employed more productively after the sale III) Transfer business units to the companies that can manage them more efficiently A. I only B. I and II only C. I, II, and III D. III only
24. The simplest way to divest an asset is: A. to spin-off B. to carve-out C. to sell it D. none of the above
25. Asset sales are common in: A. manufacturing B. banking C. services D. none of the above
26. A privatization is a: A. Sale of a government-owned company to private investors B. Sale of private companies to the government C. Sale of a publicly traded company to private investors D. None of the above
27. Most privatizations resemble: A. spin-offs B. carve-outs C. both (A) and (B) D. none of the above
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28. The following are examples of privatization except: A. Habib Bank B. AT&T C. West Japan Railway Company D. ONGC
29. Privatizations transactions resemble: A. Carve-outs B. Spin-offs C. LBOs D. None of the above
30. The following are important motives for privatization except: A. Revenue for the government B. Increased efficiency C. Share ownership D. Economies of scale
31. The following are private equity groups: A. Blackstone B. Cerberus Capital management C. KKR D. All of the above are private equity groups
32. Which of the following statements is/are true of limited partnerships? A. Limited partners enjoy limited liability but do not participate in management. B. Generally limited partners put up most of the money. C. Generally limited partners are institutional investors. D. All of the above statements are true of limited partnerships.
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33. A private-equity investment fund is organized as a: A. corporation B. sole proprietorship C. partnership D. none of the above
34. The following statements are true of partnership agreements: I) The partnership agreement has a limited term, 10 years or less. II) The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership. III) The limited partners get paid off first, but they get only 80% of any further returns. IV) The general partners can reinvest the limited partners' money. A. I and II only B. I, II and III only C. I, II, III and IV D. II and III only
35. The following are advantages of private-equity partnerships: I) carried interest gives the general partners potential for high profits. II) carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit. III) There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change. IV) There is no free cash flow problem as cash from first round must be distributed to investors. A. I, II and IV only B. I and II only C. I and IV only D. I, II, III and IV
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Chapter 32 - Corporate Restructuring
36. Private-equity partnerships can cash out in the following ways: I) by an IPO of portfolio companies. II) a trade sale to another firm. III) limited partner financing. A. I only B. II only C. I and II only D. III only
37. A conglomerate is a: A. firm that invests in one industry only B. firm that diversifies across several unrelated businesses C. firm that integrates vertically D. none of the above
38. Conglomerate discount means: I) The market value of the whole conglomerate is greater than the sum of the value of the parts II) The market value of the whole conglomerate is less than the sum of the value of the parts III) The book value of the whole conglomerate is greater than the sum of the value of the parts IV) The book value of the whole conglomerate is less than the sum of the value of the parts A. I only B. II only C. III only D. IV only
39. The following are characteristics of a public conglomerate: I) they are designed to operate various divisions for the long run. II) has an internal capital market where each division competes for funds. III) a hierarchy of corporate staff evaluates divisions' plans and performance. IV) divisional managers' compensation depends mostly on earnings of their respective divisions. A. I and II only B. I, II and III C. II, III and IV only D. I, II, III and IV
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Chapter 32 - Corporate Restructuring
40. Two in-court options for dealing with financial distress of a firm are: A. Merger and acquisition B. Liquidation and reorganization C. Leasing and LBO D. Issue stocks and bonds
41. Indirect costs of bankruptcy are borne principally by A. Bondholders B. Stockholders C. Managers D. The government
42. A bankrupt firm while being in the process of developing a reorganization plan is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called: A. Debtor-in-possession debt B. Junior creditors C. Workout D. Receiver
43. Which of the following is NOT a motive for privatization? A. Increased efficiency B. Share ownership C. Expansion of government D. Revenue for the government
44. Macquarie Bank of Australia invested in what US government assets? A. Airlines B. Parks C. Sewer systems D. Toll highways
True / False Questions
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45. Leveraged buyouts are the same as acquisitions. True False
46. LBOs are financed with junk bonds. True False
47. A spin-off is a new, independent company created by detaching part of a parent company's assets. True False
48. Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company. True False
49. Carve-outs are identical to spin-offs. True False
50. Privatization is the same as going private in a LBO. True False
51. A privatization is a sale of a government-owned company to private investors. True False
52. A major beneficiary of privatization is the government that receives the revenues. True False
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53. Private-equity partnerships can be thought of as temporary conglomerates. True False
54. In a private-equity partnership arrangement the general partners put up most of the money and receive a management fee and get a carried interest in the fund's profits. True False
55. Private-equity partnerships can run portfolio companies for ever. True False
56. There are only two types of bankruptcy procedures in the United States, which are set out Chapter 7 and 11 of the 1978 Bankruptcy Reform Act. True False
57. Securities and Exchange Commission (SEC) plays an important role in the reorganization of, particularly for large, public companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed reorganization plan. True False
58. Private-equity ownership is more focused on shareholder value than public company ownership. True False
59. Mergers often occur because managers are not maximizing shareholder value. True False
Short Answer Questions
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Chapter 32 - Corporate Restructuring
60. What is a leveraged buyout?
61. Briefly explain the difference between leveraged buyouts and leveraged restructurings.
62. What is a spin-off?
63. Briefly explain the difference between a spin-off and a carve-out.
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64. Briefly explain what is meant by privatization?
65. What are some of the benefits of privatization?
66. Explain how private-equity partnerships are set up.
67. Briefly explain the main differences between private-equity partnerships and public conglomerates.
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68. Briefly explain the Bankruptcy Reform Act of 1978.
69. Briefly explain the role of Securities and Exchange Commission (SEC) in bankruptcy reorganizations.
70. Briefly explain why private equity has an advantage in creating value over public firms.
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Chapter 32 - Corporate Restructuring
Chapter 32 Corporate Restructuring Answer Key
Multiple Choice Questions
1. The following are some of the ways in which a company structure can be modified: I) LBOs II) Privatizations III) Spin-offs and carve-outs IV) Bankruptcies A. I and II only B. II only C. I and III only D. I, II, III, and IV
Type: Medium
2. Leveraged buyouts (LBOs) almost always involve: I) a large part of the purchase price is financed mostly by debt II) most of this debt is below investment grade (junk) III) the firm goes private and its shares are no longer traded on the open market A. I only B. II only C. III only D. I, II, and III
Type: Medium
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3. When a leveraged buyout transaction is led by the firm's management then the transaction is called: A. IPO B. MBO C. MOBL D. CFO
Type: Easy
4. The largest and best documented LBO of the 1980s is the: A. KKR acquiring RJR Nabisco through LBO B. Thompson Co acquiring Southland (7-11) through LBO C. KKR acquiring Beatrice through LBO D. None of the above
Type: Medium
5. The following are examples of LBOs except: A. KKR and RJR Nabisco B. America Online and Time Warner C. KKR and Beatrice D. Thompson and Southland
Type: Easy
6. The following are examples of LBOs except: A. KKR and Safeway B. KKR and Owens-Illinois C. Fiat and Chrysler D. All of the above are LBOs
Type: Easy
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Chapter 32 - Corporate Restructuring
7. In 1991 RJR: A. reverted to being a public company B. went bankrupt because of the high debt burden C. stake held by KKR was completely sold off D. all of the above
Type: Medium
8. Largest gainers from LBOs were: A. Junk bond holders B. Raiders C. Selling stockholders D. Investment banking firms
Type: Medium
9. Junk bonds are bonds with: A. AAA or Aaa ratings B. BBB or Baa ratings C. BB or Ba ratings or lower D. D rated bonds
Type: Easy
10. The main characteristics of LBOs are: A. High debt B. Private ownership C. Management incentives D. All of the above
Type: Medium
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11. The gains from LBOs are from: A. Tax savings because of high debt servicing B. Loss in the value to bondholders C. Improved performance because of incentives to mangers and employees D. All of the above
Type: Medium
12. In the case of RJR Nabisco LBO, the gain in market value RJR stockholders were several times more than: A. estimated value of additional interest tax shields generated by the LBO B. estimated losses to RJR bondholders as result of drastic decline in bond ratings C. (A) and (B) combined D. none of the above
Type: Difficult
13. The main characteristics of leveraged restructuring are: I) High debt II) Management incentives III) Private ownership A. I only B. I and II only C. I and III only D. I, II, and III
Type: Medium
14. Leveraged restructurings are designed to force mature, successful but overweight firms to: A. reduce cash B. reduce operating costs C. use assets more efficiently D. all of the above
Type: Medium
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15. The following are examples of spin-offs except: A. Abbot Laboratories and Hospira B. AT&T and Lucent C. General Motors and EDS D. Exxon and Mobil
Type: Medium
16. In case of spin-offs: A. Shares of the new company are given to shareholders of the parent company B. Shares of the new company are sold as a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above
Type: Difficult
17. Spin-offs are not taxed if the shareholders of the parent company are given at least: A. 90% of the shares in the new company B. 80% of the shares in the new company C. 70% of the shares in the new company D. 60% of the shares in the new company
Type: Difficult
18. A spin-off is a/an I) new company. II) independent company. III) company formed by detaching part of a parent firm's assets and operations. A. I only B. II only C. I and II only D. I, II and III
Type: Medium
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Chapter 32 - Corporate Restructuring
19. The following are advantages of spin-offs: I) they widen investor choice by allowing them to invest in just one part of the business. II) they can improve incentives for managers. III) by spinning of businesses with "poor fit" parent firms can concentrate on its main activities. IV) they relieve investors of the worry that funds will be siphoned off from one business to support unprofitable capital investments in another. A. I and II only B. I, II and III only C. I, II, III and IV D. III and IV only
Type: Medium
20. In case of carve-outs: A. Shares of the new company are given to the shareholders of the parent company B. Shares of the new company are sold in a public offering C. Shares of the new company are bought by borrowing or issuing junk bonds D. None of the above
Type: Difficult
21. The following are examples of carve-outs except: A. Bristol Myers Squibb and Mead Johnson Nutrition B. 3Com and Palm C. AT&T and Lucent D. All of the above are examples of carve-outs
Type: Medium
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22. Which of the following statements regarding spin-offs and carve-outs is not true? A. Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B. Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C. Gains or losses from carve-outs are taxed at the corporate tax rate D. In Carve-outs, parent company has the majority control
Type: Medium
23. Asset sales are: I) Good news for investors in the selling firm II) On average the assets are employed more productively after the sale III) Transfer business units to the companies that can manage them more efficiently A. I only B. I and II only C. I, II, and III D. III only
Type: Easy
24. The simplest way to divest an asset is: A. to spin-off B. to carve-out C. to sell it D. none of the above
Type: Medium
25. Asset sales are common in: A. manufacturing B. banking C. services D. none of the above
Type: Easy
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26. A privatization is a: A. Sale of a government-owned company to private investors B. Sale of private companies to the government C. Sale of a publicly traded company to private investors D. None of the above
Type: Difficult
27. Most privatizations resemble: A. spin-offs B. carve-outs C. both (A) and (B) D. none of the above
Type: Easy
28. The following are examples of privatization except: A. Habib Bank B. AT&T C. West Japan Railway Company D. ONGC
Type: Easy
29. Privatizations transactions resemble: A. Carve-outs B. Spin-offs C. LBOs D. None of the above
Type: Easy
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30. The following are important motives for privatization except: A. Revenue for the government B. Increased efficiency C. Share ownership D. Economies of scale
Type: Medium
31. The following are private equity groups: A. Blackstone B. Cerberus Capital management C. KKR D. All of the above are private equity groups
Type: Easy
32. Which of the following statements is/are true of limited partnerships? A. Limited partners enjoy limited liability but do not participate in management. B. Generally limited partners put up most of the money. C. Generally limited partners are institutional investors. D. All of the above statements are true of limited partnerships.
Type: Medium
33. A private-equity investment fund is organized as a: A. corporation B. sole proprietorship C. partnership D. none of the above
Type: Easy
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Chapter 32 - Corporate Restructuring
34. The following statements are true of partnership agreements: I) The partnership agreement has a limited term, 10 years or less. II) The general partners get a management fee plus carried interest in 20% of any profits earned by the partnership. III) The limited partners get paid off first, but they get only 80% of any further returns. IV) The general partners can reinvest the limited partners' money. A. I and II only B. I, II and III only C. I, II, III and IV D. II and III only
Type: Difficult
35. The following are advantages of private-equity partnerships: I) carried interest gives the general partners potential for high profits. II) carried interest, because it a call option, gives the general partners incentives to take risks as they are strongly motivated to earn back the limited partners' investment and deliver a profit. III) There is no separation of ownership and control and general partners can intervene in the fund's portfolio companies any time performance lags or strategy needs change. IV) There is no free cash flow problem as cash from first round must be distributed to investors. A. I, II and IV only B. I and II only C. I and IV only D. I, II, III and IV
Type: Difficult
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Chapter 32 - Corporate Restructuring
36. Private-equity partnerships can cash out in the following ways: I) by an IPO of portfolio companies. II) a trade sale to another firm. III) limited partner financing. A. I only B. II only C. I and II only D. III only
Type: Medium
37. A conglomerate is a: A. firm that invests in one industry only B. firm that diversifies across several unrelated businesses C. firm that integrates vertically D. none of the above
Type: Easy
38. Conglomerate discount means: I) The market value of the whole conglomerate is greater than the sum of the value of the parts II) The market value of the whole conglomerate is less than the sum of the value of the parts III) The book value of the whole conglomerate is greater than the sum of the value of the parts IV) The book value of the whole conglomerate is less than the sum of the value of the parts A. I only B. II only C. III only D. IV only
Type: Difficult
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Chapter 32 - Corporate Restructuring
39. The following are characteristics of a public conglomerate: I) they are designed to operate various divisions for the long run. II) has an internal capital market where each division competes for funds. III) a hierarchy of corporate staff evaluates divisions' plans and performance. IV) divisional managers' compensation depends mostly on earnings of their respective divisions. A. I and II only B. I, II and III C. II, III and IV only D. I, II, III and IV
Type: Medium
40. Two in-court options for dealing with financial distress of a firm are: A. Merger and acquisition B. Liquidation and reorganization C. Leasing and LBO D. Issue stocks and bonds
Type: Easy
41. Indirect costs of bankruptcy are borne principally by A. Bondholders B. Stockholders C. Managers D. The government
Type: Medium
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Chapter 32 - Corporate Restructuring
42. A bankrupt firm while being in the process of developing a reorganization plan is allowed to buy goods on credit and borrow money to finance needed working capital. Such an arrangement is called: A. Debtor-in-possession debt B. Junior creditors C. Workout D. Receiver
Type: Difficult
43. Which of the following is NOT a motive for privatization? A. Increased efficiency B. Share ownership C. Expansion of government D. Revenue for the government
Type: Easy
44. Macquarie Bank of Australia invested in what US government assets? A. Airlines B. Parks C. Sewer systems D. Toll highways
Type: Easy
True / False Questions
45. Leveraged buyouts are the same as acquisitions. FALSE
Type: Medium
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Chapter 32 - Corporate Restructuring
46. LBOs are financed with junk bonds. TRUE
Type: Medium
47. A spin-off is a new, independent company created by detaching part of a parent company's assets. TRUE
Type: Medium
48. Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company. TRUE
Type: Medium
49. Carve-outs are identical to spin-offs. FALSE
Type: Medium
50. Privatization is the same as going private in a LBO. FALSE
Type: Difficult
51. A privatization is a sale of a government-owned company to private investors. TRUE
Type: Medium
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Chapter 32 - Corporate Restructuring
52. A major beneficiary of privatization is the government that receives the revenues. TRUE
Type: Medium
53. Private-equity partnerships can be thought of as temporary conglomerates. TRUE
Type: Medium
54. In a private-equity partnership arrangement the general partners put up most of the money and receive a management fee and get a carried interest in the fund's profits. FALSE
Type: Medium
55. Private-equity partnerships can run portfolio companies for ever. FALSE
Type: Medium
56. There are only two types of bankruptcy procedures in the United States, which are set out Chapter 7 and 11 of the 1978 Bankruptcy Reform Act. TRUE
Type: Medium
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Chapter 32 - Corporate Restructuring
57. Securities and Exchange Commission (SEC) plays an important role in the reorganization of, particularly for large, public companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed reorganization plan. TRUE
Type: Medium
58. Private-equity ownership is more focused on shareholder value than public company ownership. TRUE
Type: Medium
59. Mergers often occur because managers are not maximizing shareholder value. TRUE
Type: Medium
Short Answer Questions
60. What is a leveraged buyout? A leveraged buyout (LBO) is the takeover of the firm by a group of investors using borrowed funds. Generally, borrowed funds are obtained by issuing junk bonds. LBO goes private and its shares are no longer on the open market.
Type: Medium
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Chapter 32 - Corporate Restructuring
61. Briefly explain the difference between leveraged buyouts and leveraged restructurings. The financial characteristics of LBOs and leveraged restructurings are similar. The three main characteristics of LBOs are: high debt, incentives to managers and private ownership. Leveraged restructurings share the first two characteristics but continue to operate as public companies.
Type: Medium
62. What is a spin-off? A spin-off is a new independent company created by detaching part of a parent company's assets and operations. Shares of the new company are distributed to the parent company's stockholders.
Type: Medium
63. Briefly explain the difference between a spin-off and a carve-out. Carve-outs are similar to spin-offs, except that the shares in the new company are sold in a public offering. The cash flows to the parent company are subject to taxes. In the case of spinoffs the shares of the new company are distributed to the shareholders of the parent company and the transaction is not taxed as long as the shareholders of the parent company receive 80% of the shares.
Type: Medium
64. Briefly explain what is meant by privatization? A privatization is a sale of a government-owned company to private investors. A privatization is somewhat similar to a carve-out in that the shares of the company are sold to investors.
Type: Medium
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Chapter 32 - Corporate Restructuring
65. What are some of the benefits of privatization? Importantly, there are three benefits to privatization. First, the revenue for the government is enhanced. Second, widespread share ownership and lastly, increased efficiency of operations.
Type: Medium
66. Explain how private-equity partnerships are set up. Private equity partnerships manage private-equity investment fund that is used to buy firms. The general partner sets up and manages the partnership. The limited partners put up most of the money. They are mostly institutional investors, including pension funds, endowments and insurance companies. The general partners, who organize and manage the funds, receive a management fee and get a carried interest in the fund's profits. Once the investment is returned limited partners get 80% of any profits. The general partners get a 20% carried interest. The partnership agreement has a limited term which is 10 years or less. At the end of the term the portfolio companies are sold and the proceeds distributed. There are only two ways to cash out. The portfolio companies are cashed out through an IPO issue or through a trade sale to another company.
Type: Difficult
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Chapter 32 - Corporate Restructuring
67. Briefly explain the main differences between private-equity partnerships and public conglomerates. Both private-equity partnerships and public conglomerates diversify by investing in a portfolio of unrelated businesses. But their financial structures and organizations are totally different. Private-equity partnerships are limited-life partnerships and are forced to divest the portfolio firms through IPOs or sale to another firm at the end of the term. Public conglomerates are designed to run and operate their divisions for the long run. Firms owned by private-equity funds do not have any direct financial links or fund transfers between portfolio firms. Public conglomerates have an internal capital market and various divisions are competing for funds. In the case of private-equity partnerships, general partners execute the deals and monitor the performance of the portfolio firms. Similarly, lenders also monitor. In the case of conglomerates, corporate staff evaluates divisions' plans and monitor performance. In the case of private-equity partnerships, managers' compensation depend on the exit value of the firm. In the case of conglomerates, divisional mangers' compensation depends on earnings.
Type: Difficult
68. Briefly explain the Bankruptcy Reform Act of 1978. The Bankruptcy Reform Act of 1978 established a federal bankruptcy court system with exclusive jurisdiction over bankruptcy cases. Under this Act, a company may file a petition for liquidation under Chapter 7 or for reorganization under Chapter 11. Court acceptance of the petition protects the debtor from legal actions by creditors. When a firm files for Chapter 7, all remaining assets are liquidated and the firm no longer exists. When firm files for Chapter 11, it is allowed to reorganize under court protection, to restructure debts and to emerge from bankruptcy after certain conditions imposed by the court is met.
Type: Medium
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Chapter 32 - Corporate Restructuring
69. Briefly explain the role of Securities and Exchange Commission (SEC) in bankruptcy reorganizations. The SEC plays an important role in reorganizations, particularly for large, public Companies by ensuring that all relevant and material information is disclosed to the creditors before they vote on the proposed plan of reorganization under Chapter 11 of the bankruptcy code.
Type: Difficult
70. Briefly explain why private equity has an advantage in creating value over public firms. Public firms suffer from agency problems and a separation of management from ownership. This tension causes managers to look out for their own interests at the expense of owner's interests. Private equity firms offer owners much more control over the managers of the company. As such, the managers work to maximize owner value and not their own.
Type: Difficult
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