Principles & Practices Flashcards

Which of the following is NOT a recognized test of insolvency under U.S. law?

Answer: Market capitalization insolvency (stock price below book value)

U.S. insolvency law recognizes three tests: balance sheet, cash flow, and unreasonably small capital; stock price relative to book value is not a legal insolvency test.

In a liquidation analysis prepared for a Chapter 11 plan, what is the primary purpose?

Answer: To demonstrate that creditors receive at least as much as they would in a Chapter 7 liquidation

The liquidation analysis satisfies the 'best interests of creditors' test under § 1129(a)(7), showing that each creditor receives at least a Chapter 7 liquidation recovery.

A 'rights offering' in the context of a Chapter 11 plan of reorganization allows:

Answer: Certain creditors to purchase new equity in the reorganized debtor at a discount

A rights offering gives eligible creditors (often a backstopped class) the right to purchase newly issued equity in the reorganized company, often at a discount to estimated enterprise value.

When a restructuring advisor prepares a going-concern valuation using discounted cash flow (DCF) analysis, the terminal value is most sensitive to changes in:

Answer: The weighted average cost of capital (WACC) and long-term growth rate

Terminal value, which typically represents the majority of DCF value, is highly sensitive to small changes in the discount rate (WACC) and the assumed perpetual growth rate.

Under the CIRA Body of Knowledge, which concept describes a lender's right to receive proceeds from collateral before unsecured creditors?

Answer: Secured creditor priority

Secured creditors have a priority interest in their collateral, meaning they are paid from collateral proceeds before general unsecured creditors receive any distribution.

What is 'substantive consolidation' in a multi-entity bankruptcy case?

Answer: Treating the assets and liabilities of related debtors as if they were a single estate for distribution purposes

Substantive consolidation pools the assets and liabilities of affiliated debtors into one estate, affecting creditor recoveries based on the combined pool rather than individual entities.

Which of the following best defines 'net present value' (NPV) as used in restructuring valuations?

Answer: The present value of expected future cash flows discounted at the appropriate risk-adjusted rate

NPV is the sum of future cash flows, each discounted back to today using a rate that reflects the time value of money and investment risk.