Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 97
CHAPTER 15
FINANCIALLY TROUBLED VENTURES: TURNAROUND
OPPORTUNITIES?
True–False Questions
T. 1. During the development, startup, and survival stages of a venture’s life cycle,
the relevant financing and operating decisions faced are either restructuring or
liquidating.
T. 2. During the rapid growth stage of a venture’s life cycle, the relevant financing
and operating decisions encountered are to go public, or to sell or merge the firm.
F. 3. Foreclosure occurs when cash flows are insufficient to meet current debt
obligations.
F. 4. Balance sheet insolvency exists when a venture has negative net debt.
F. 5. When a venture’s cash flow is insufficient to met its current contractual debt
obligations asset flow insolvency exists.
T. 6. Nearly one-fourth of all businesses dissolve within two years of beginning
operations, and over one-half of new ventures dissolve within four years.
F. 7. Chapter 11 bankruptcy filing requires liquidation of the venture.
F. 8. Chapter 7 bankruptcy filing permits for the attempt to reorganize.
T. 9. Asset restructuring involves improving the working capital to sales
relationship and/or selling off fixed assets.
F. 10. A private workout is a voluntary agreement between a venture’s owners and
its shareholders that provides for a financial restructuring of the venture’s
outstanding debt.
T. 11. The transfer of title to the venture’s assets to a third-party trustee is called
assignment.
T. 12. A voluntary bankruptcy petition if filed by the venture’s management.
F. 13. An involuntary bankruptcy petition is filed by the venture’s management.
T. 14. The common pool problem exists because individual
creditors have the incentive to foreclosure on the venture even though it is worth
more as a going concern.
,98 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
T. 15. Financial distress occurs when cash flow is insufficient to meet
current debt obligations
T. 16. Foreclosure is the legal process used by creditors to try to collect amounts
owed on loans in default
F. 17. A “cross default provision” provides that defaulting on one loan makes the
venture liquidate all other loans.
T. 18. An “acceleration provision” provides that all future interest and principal
obligations on a loan become immediately due when default occurs.
F. 19. A “cross default provision” and an “acceleration provision” both cause
principal obligations on a loan to become immediately due.
T. 20. “Foreclosure” is a legal process used by creditors to try to collect amounts
owed on loans in default.
F. 21. “Balance sheet insolvency” exists when a venture’s total assets exceeds its
total debt.
T. 22. “Balance sheet insolvency” exists when a venture has negative book equity or
net worth.
T. 23. “Cash flow insolvency” exists when a venture’s cash flow is insufficient to
meet its current contractual debt obligations.
F. 24. “Operations restructuring” involves growing revenues relative to costs and
selling off fixed assets.
T. 25. “Asset restructuring” involves improving the working-capital-to-sales
relationship and/or selling off fixed assets.
Multiple-Choice Questions
d. 1. During the development stage of a venture’s life cycle, which of the following
is not a basis for operating or financial decisions?
a. screening business ideas
b. preparing the business plan
c. obtaining seed financing
d. managing the ongoing operations
a. 2. During the startup stage of a venture’s life cycle, which of the following is not
a basis for operating or financial decisions?
, Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 99
a. creating and building value
b. choosing organizational form
c. preparing initial financial statements
d. obtaining startup financing
b. 3. During the survival stage of a venture’s life cycle, which of the following is
not a basis for operating or financial decisions?
a. monitoring financial performance
b. obtaining seasoned financing
c. projecting cash needs
d. obtaining first round financing
c. 4. During the rapid growth stage of a venture’s life cycle, which of the following
is not a basis for operating or financial decisions?
a. creating and building value
b. obtaining additional financing
c. choosing the organizational structure
d. examining exit opportunities
d. 5. During the maturity stage of a venture’s life cycle, which of the following is
not a basis for operating or financial decisions?
a. managing ongoing operations
b. maintaining and adding value
c. obtaining seasoned financing
d. obtaining seed financing
b. 6. Which of the following refers to the failure to meet loan interest or principal
payments when due?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
c. 7. Which of the following provides that all future interest and principal
obligations on a loan become immediately due when default occurs?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
d. 8. Which of the following provides that defaulting on one loan places all loans in
default?
a. insolvency
b. loan default
, 100 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
c. acceleration provision
d. cross default provision
e. foreclosure
e. 9. Which of the following refers to the legal process used by creditors to try to
collect amounts owed on loans in default?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
a. 10. When a venture has a negative equity or net worth position and/or when its
cash flow is insufficient to meet current debt obligations refers to which of the
following?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
c. 11. When a venture is in financial distress but believes it has a turnaround
opportunity, which of the following won’t apply?
a. operations restructuring
b. asset restructuring
c. private liquidation
d. financial restructuring
c. 12. When a venture files for legal bankruptcy through Chapter 11 and attempts to
reorganize, which is not likely to be a possible outcome?
a. Chapter 7 liquidation
b. merge the venue
c. restructuring of assets
d. reorganize and continue to operate
a. 13. Your firm had net sales of $80,000 this past year and receivables of $20,000;
and a cost of goods sold of $522,000. What were the days sales outstanding?
a. 91 days
b. 48 days
c. 36 days
d. 5 days
e. 4 days
a. 14. Your firm has inventory of $188,000, cost of goods sold of $522,000, and
accounts receivable of $214,000. What is your inventory conversion period?
a. 131 days
CHAPTER 15
FINANCIALLY TROUBLED VENTURES: TURNAROUND
OPPORTUNITIES?
True–False Questions
T. 1. During the development, startup, and survival stages of a venture’s life cycle,
the relevant financing and operating decisions faced are either restructuring or
liquidating.
T. 2. During the rapid growth stage of a venture’s life cycle, the relevant financing
and operating decisions encountered are to go public, or to sell or merge the firm.
F. 3. Foreclosure occurs when cash flows are insufficient to meet current debt
obligations.
F. 4. Balance sheet insolvency exists when a venture has negative net debt.
F. 5. When a venture’s cash flow is insufficient to met its current contractual debt
obligations asset flow insolvency exists.
T. 6. Nearly one-fourth of all businesses dissolve within two years of beginning
operations, and over one-half of new ventures dissolve within four years.
F. 7. Chapter 11 bankruptcy filing requires liquidation of the venture.
F. 8. Chapter 7 bankruptcy filing permits for the attempt to reorganize.
T. 9. Asset restructuring involves improving the working capital to sales
relationship and/or selling off fixed assets.
F. 10. A private workout is a voluntary agreement between a venture’s owners and
its shareholders that provides for a financial restructuring of the venture’s
outstanding debt.
T. 11. The transfer of title to the venture’s assets to a third-party trustee is called
assignment.
T. 12. A voluntary bankruptcy petition if filed by the venture’s management.
F. 13. An involuntary bankruptcy petition is filed by the venture’s management.
T. 14. The common pool problem exists because individual
creditors have the incentive to foreclosure on the venture even though it is worth
more as a going concern.
,98 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
T. 15. Financial distress occurs when cash flow is insufficient to meet
current debt obligations
T. 16. Foreclosure is the legal process used by creditors to try to collect amounts
owed on loans in default
F. 17. A “cross default provision” provides that defaulting on one loan makes the
venture liquidate all other loans.
T. 18. An “acceleration provision” provides that all future interest and principal
obligations on a loan become immediately due when default occurs.
F. 19. A “cross default provision” and an “acceleration provision” both cause
principal obligations on a loan to become immediately due.
T. 20. “Foreclosure” is a legal process used by creditors to try to collect amounts
owed on loans in default.
F. 21. “Balance sheet insolvency” exists when a venture’s total assets exceeds its
total debt.
T. 22. “Balance sheet insolvency” exists when a venture has negative book equity or
net worth.
T. 23. “Cash flow insolvency” exists when a venture’s cash flow is insufficient to
meet its current contractual debt obligations.
F. 24. “Operations restructuring” involves growing revenues relative to costs and
selling off fixed assets.
T. 25. “Asset restructuring” involves improving the working-capital-to-sales
relationship and/or selling off fixed assets.
Multiple-Choice Questions
d. 1. During the development stage of a venture’s life cycle, which of the following
is not a basis for operating or financial decisions?
a. screening business ideas
b. preparing the business plan
c. obtaining seed financing
d. managing the ongoing operations
a. 2. During the startup stage of a venture’s life cycle, which of the following is not
a basis for operating or financial decisions?
, Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 99
a. creating and building value
b. choosing organizational form
c. preparing initial financial statements
d. obtaining startup financing
b. 3. During the survival stage of a venture’s life cycle, which of the following is
not a basis for operating or financial decisions?
a. monitoring financial performance
b. obtaining seasoned financing
c. projecting cash needs
d. obtaining first round financing
c. 4. During the rapid growth stage of a venture’s life cycle, which of the following
is not a basis for operating or financial decisions?
a. creating and building value
b. obtaining additional financing
c. choosing the organizational structure
d. examining exit opportunities
d. 5. During the maturity stage of a venture’s life cycle, which of the following is
not a basis for operating or financial decisions?
a. managing ongoing operations
b. maintaining and adding value
c. obtaining seasoned financing
d. obtaining seed financing
b. 6. Which of the following refers to the failure to meet loan interest or principal
payments when due?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
c. 7. Which of the following provides that all future interest and principal
obligations on a loan become immediately due when default occurs?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
d. 8. Which of the following provides that defaulting on one loan places all loans in
default?
a. insolvency
b. loan default
, 100 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
c. acceleration provision
d. cross default provision
e. foreclosure
e. 9. Which of the following refers to the legal process used by creditors to try to
collect amounts owed on loans in default?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
a. 10. When a venture has a negative equity or net worth position and/or when its
cash flow is insufficient to meet current debt obligations refers to which of the
following?
a. insolvency
b. loan default
c. acceleration provision
d. cross default provision
e. foreclosure
c. 11. When a venture is in financial distress but believes it has a turnaround
opportunity, which of the following won’t apply?
a. operations restructuring
b. asset restructuring
c. private liquidation
d. financial restructuring
c. 12. When a venture files for legal bankruptcy through Chapter 11 and attempts to
reorganize, which is not likely to be a possible outcome?
a. Chapter 7 liquidation
b. merge the venue
c. restructuring of assets
d. reorganize and continue to operate
a. 13. Your firm had net sales of $80,000 this past year and receivables of $20,000;
and a cost of goods sold of $522,000. What were the days sales outstanding?
a. 91 days
b. 48 days
c. 36 days
d. 5 days
e. 4 days
a. 14. Your firm has inventory of $188,000, cost of goods sold of $522,000, and
accounts receivable of $214,000. What is your inventory conversion period?
a. 131 days
