- CFA Exams
- CFA Level I Exam
- Study Session 11. Corporate Finance (2)
- Reading 34. Measures of Leverage
- Subject 4. The Risks of Creditors and Owners
CFA Practice Question
In cases of corporate liquidation, ______
II. creditors receive distribution according to the absolute priority rule.
III. the relevant rules are provided in Chapter Seven of the Bankruptcy Act.
I. all the assets are distributed and no corporate entity survives.
II. creditors receive distribution according to the absolute priority rule.
III. the relevant rules are provided in Chapter Seven of the Bankruptcy Act.
Correct Answer: I, II and III
User Contributed Comments 3
| User | Comment |
|---|---|
| Nikolhearn | Corporate liquidation is referring to high operating leverage firms, where as corp reorganisation refers to high financial leverage firms. Therefore how do bankruptcy laws protect high operating leverage firms in corp liquidation? |
| john6668 | Pretty sure the text says that absolute priority rule rarely happens in practice, so surprising they put that as an answer. Guess they are testing concepts. |
| PeterHaber | On Chapter 11 you restructure debt, on Chapter 7 you don plan to pay it, much less restructure it. You just use the proceeds you can get by liquidating assets and pay creditors at a huge discount of their face value. |