Applied Corporate Finance – FINN 400 (01) Name: _______________________

Quiz # 12 – Spring Semester 2021 (April 16, 2021) ID #: ________________

Total Points: 10

1. Which of the following statements is true?

a. Whether default occurs depends on the cash flows, not on the relative values of the firm's assets and
liabilities.
b. Altman’s Z-score bankruptcy prediction model is structured on the assumption of sudden collapse of the
firm as opposed to evolutionary decay.
*c. Successful private workouts are better for firms than formal bankruptcy because direct costs are
considerably lower in private workouts.
d. Stock-based insolvency occurs when the operating cash flows of the firm are not sufficient to meet the
contractual obligations of the firm.
e. More than one of the statements are true

2. Which of the following statements is false?

*a. Involuntary bankruptcy filing is when the firm itself approaches the court to seek protection from
creditors.
b. Equity holders may prefer a formal bankruptcy filing as opposed to private workout because the firm can
issue Debtor-in-Possession (DIP) securities and delay or suspend pre-bankruptcy interest payments.
c. Responses to financial distress include - asset restructuring, financial restructuring and liquidation.
d. A firm that fails to make the required interest or principal payments on the debt is in default.
e. More than one of the statements are false

3. Which of the following statements is false?

a. Aside from the direct legal and administrative costs of bankruptcy, many other indirect costs are
associated with financial distress (whether or not the firm has formally filed for bankruptcy).
b. The absolute priority rules (APR) set the order of settlement in liquidation.
*c. As part of financial restructuring, a.k.a. ‘haircuts’, subordinated debt is often replaced with senior debt.
d. Bankruptcy is rarely simple and straightforward—equity holders don't just "hand the keys" to debt
holders the moment the firm defaults on a debt payment.
e. More than one of the statements are false

4. Which of the following statements is false?

*a. The difference between liquidation and reorganization is that reorganization terminates all operations of
the firm and liquidation only terminates non-profitable operations.
b. A judge may allow a firm to submit the reorganization plan if the liquidity problems are considered
temporary in nature.
c. Indirect costs of financial distress include impaired ability to conduct business, lack of access to credit,
and increased agency costs.
d. While developing a Chapter 11 reorganization plan, management continues to operate the business.
e. More than one of the statements are false

5. All of the following are options available to a firm in times of financial distress, except:
a. Negotiate with lenders
*b. raise new funds by selling securities junior in claim to existing debt
c. sell major assets and reduce capex and other expenses
d. merge with another firm
e. file for reorganization or liquidation
6. A firm is adjudged bankrupt under Chapter 7. When do the shareholders receive any payment?
a. After the trustee liquidates the assets and pays the administrative expenses, the shareholders are paid
before the creditors.
*b. After the trustee liquidates the assets, the administrative expenses and secured creditors are paid, then the
unsecured creditors, and, then the shareholders divide any remainder.
c. After the trustee liquidates the assets, the shareholders are paid, next the administrative expenses, the
secured creditors, and then the unsecured creditors divide any remainder.
d. After the trustee liquidates the assets the shareholders are paid first because they are the owners of the
firm and have the principal stake.

7. Which of the following statements is false?

a. The creditors must vote to accept the Chapter 11 reorganization plan, and the bankruptcy court must
approve it. If an acceptable plan is not proposed by management, the court may ultimately force a Chapter
7 liquidation of the firm.
b. Bankruptcy protection can be used by management to delay the liquidation of a firm that should be shut
down.
*c. Although indirect costs of bankruptcy are difficult to measure accurately, they are typically much smaller
than the direct costs of bankruptcy.
d. Because many aspects of the bankruptcy process are independent of the size of the firm, the costs are
typically higher, in percentage terms, for smaller firms.
e. More than one of the statements are false

8. Which of the following statements is false?

*a. Spin-offs are similar to equity carve-outs, except that shares of the new entity are sold to public
in an initial offering.
b. The primary purpose of a typical divestiture is to bring more focus to the firm’s operations
c. Because debtor-in-possession (DIP) financing is senior to all existing creditors: it allows a firm that has
filed for reorganization renewed access to financing to keep operating.
d. Debt covenants are often designed to prevent management from exploiting debt holders, so they may help
to reduce agency costs.
e. More than one of the statements are false

9. Which of the following statements is false?

a. An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within
a specified period of time.
b. An option that gives the holder the right to sell a stock at a specified price at some future time is a put
option.
*c. At expiration the maximum price of a call is the greater of (Exercise – Stock Price) or 0
d. At expiration the maximum price of a put is the greater of (Exercise – Stock Price) or 0.
e. The time value of an option is the difference between its premium (market price) and its intrinsic value.

10. Which of the following statements are correct?

a. The exchange rate quotation in the form Yens 114.6/US$ is called an indirect quotation for a U.S. based
investor.
b. The spot US$/BP exchange rate is 1.65. The indirect quote will be 0.606 BP/US$.
c. A currency forward contract is described as agreeing to buy or sell specified amount of a currency at a
later date at a price set in the future.
*d. More than one of the given statements are correct

11. Which of the following statements is not correct?

a. Interest Rate Parity (IRP) states that the expected percentage change in the exchange rate is equal to the
difference in interest rates between the two countries.
*b. The international Fisher effect says that nominal interest rates are equal across countries.
c. Absolute Purchasing Power Parity (PPP) states that a commodity costs the same regardless of what
currency is used to purchase it.
d. more than one of the given statements are not correct
10.a Assume you are given the following information on Pacific Corporation. (1) Current stock price is $30, (2) strike
price is $35, (3) time to expiration is 3 months, (4) annualize risk-free rate is 5%, and (5) variance of stock return
is 25%. Given the above information, you have calculated the following components of the Black-Scholes model:
• d1 = -0.4416
• d2 = -0.6916
• N(d1) = 0.3294
• N(d2) = 0.2446

Using the Black-Scholes model, what is the value of the call option? Call = S0*N(d1)-X*exp(-r*T)*N(d2)
*a. 1.43
b. 8.23
c. 7.95
d. 5.99

10.b Assume you are given the following information on Pacific Corporation. (1) Current stock price is $40, (2) strike
price is $51, (3) time to expiration is 5-years, (4) annualize risk-free rate is 5%, and (5) variance of stock return
is 5.29%. Given the above information, you have calculated the following components of the Black-Scholes
model:
• d1 = .2709
• d2 = -0.2434
• N(d1) = 0.6068
• N(d2) = 0.4038

Using the Black-Scholes model, what is the value of the call option? Call = S0*N(d1)-X*exp(-r*T)*N(d2)
a. 1.43
*b. 8.23
c. 7.95
d. 5.99