Which of the Following Statements Is False

question 42

Multiple Choice

Which of the following statements is false?

• A) The direct costs of bankruptcy are likely to be higher for firms with more complicated business operations and for firms with larger numbers of creditors, because it may be more difficult to reach agreement among many creditors regarding the final disposition of the firm's assets.
• B) In a prepackaged bankruptcy (or "prepack") a firm will first develop a reorganization plan with the agreement of its main creditors, and then file Chapter 7 to implement the plan and pressure any creditors who attempt to hold out for better terms.
• C) A study of Chapter 7 liquidations of small businesses in the U.S. found that the average direct costs of bankruptcy were 12% of the value of the firm's assets.
• D) Studies typically report that the average direct costs of bankruptcy are approximately 3% to 4% of the pre-bankruptcy market value of total assets.

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Definitions:

Bonds

Financial instruments issued by corporations, governments, or other entities to finance projects or operations, representing a loan from the investor to the issuer that is to be repaid with interest.

Stock

Shares of ownership in a corporation, representing a claim on part of the corporation's assets and earnings.

Present Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return.

Interest Rate

The portion of a loan incurred as interest by the borrower, generally stated as an annual percentage of the loan yet to be repaid.