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FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A credit analyst compares Chapter 7 and Chapter 11 for a distressed firm whose going-concern value exceeds its liquidation value. Which conclusion best supports choosing Chapter 11 from creditors' collective perspective?

Chapter 11 supports creditors when going-concern value exceeds liquidation value, because reorganization preserves value that a piecemeal Chapter 7 asset sale would lose, potentially raising total recoveries. It does not remove administrative costs, put equity ahead of creditors, or require operations to stop.

  1. AReorganization can preserve going-concern value that a piecemeal asset sale would destroy, potentially raising total creditor recoveries.Correct
  2. BChapter 11 eliminates all administrative costs relative to liquidation.
  3. CChapter 11 guarantees that equity holders are paid before unsecured creditors.
  4. DChapter 11 requires the firm to stop operating while the plan is negotiated.

Explanation

When going-concern value exceeds liquidation value, reorganizing keeps the business intact and can increase total recoveries. Chapter 11 does not remove administrative costs, does not favor equity over creditors, and normally allows operations to continue.

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