TMA Introduction to Business 5 — Questions and Answers
Question 1: Which of the following best describes a 'prepackaged bankruptcy'?
- A bankruptcy filing that includes pre-arranged sales of all assets
- A restructuring where creditors agree to the reorganization plan before filing for Chapter 11 (Correct answer)
- A bankruptcy initiated by creditors rather than the company
- A streamlined liquidation process under Chapter 7
Correct answer: A restructuring where creditors agree to the reorganization plan before filing for Chapter 11
In a prepackaged bankruptcy, the company negotiates its reorganization plan with key creditors before filing, reducing the time and cost of the court process.
Question 2: What is the primary risk of 'concentration risk' in a company's customer base?
- Too many customers making billing inefficient
- Over-reliance on a few customers so that losing one causes severe revenue decline (Correct answer)
- Customer service resources being spread too thin
- Geographic concentration leading to logistics inefficiencies
Correct answer: Over-reliance on a few customers so that losing one causes severe revenue decline
Customer concentration risk means that the loss of one or a few major clients can disproportionately damage revenue and viability.
Question 3: In business turnarounds, 'headcount reduction' is typically used as:
- A first-resort solution to all financial problems
- A tactical cost-reduction lever, often combined with operational redesign (Correct answer)
- A strategy to increase productivity without financial impact
- A method to retain only senior management
Correct answer: A tactical cost-reduction lever, often combined with operational redesign
Workforce reductions are a common cost lever in turnarounds but should be paired with process and structural changes to avoid recurring distress.
Question 4: Which metric measures how efficiently a company uses its assets to generate revenue?
- Debt-to-equity ratio
- Asset turnover ratio (Correct answer)
- Current ratio
- Price-to-earnings ratio
Correct answer: Asset turnover ratio
Asset turnover ratio (revenue divided by total assets) measures how effectively a company deploys its asset base to generate sales.
Question 5: A turnaround plan that focuses on divesting non-core business units is primarily aimed at:
- Increasing the company's product diversity
- Raising cash and focusing management attention on the most viable operations (Correct answer)
- Complying with antitrust regulations
- Expanding into new geographic markets
Correct answer: Raising cash and focusing management attention on the most viable operations
Divesting non-core units generates cash liquidity and allows management to concentrate resources on the businesses most likely to recover.
Question 6: What is a 'forbearance agreement' in the context of distressed lending?
- A lender's commitment to provide additional financing
- A lender's temporary agreement not to enforce default remedies while the borrower restructures (Correct answer)
- A debt-for-equity swap arrangement
- A guarantee provided by a third party to support the loan
Correct answer: A lender's temporary agreement not to enforce default remedies while the borrower restructures
A forbearance agreement gives the distressed borrower a limited window of time to fix its problems without the lender immediately accelerating the debt.
Question 7: Which of the following is the most accurate definition of 'insolvency'?
- A company reporting a net loss for more than two consecutive quarters
- A company's inability to pay its debts as they come due (Correct answer)
- A company's stock price falling below book value
- A company failing to meet its revenue projections
Correct answer: A company's inability to pay its debts as they come due
Insolvency occurs when a company cannot meet its financial obligations as they become due, regardless of its asset values on paper.
TMA Introduction to Business 5
Which of the following best describes a 'prepackaged bankruptcy'?