Chapter 11: Q-32E (page 649)

Time in bankruptcy. Financially distressed firms can gain protection from their creditors while they restructure by filing for protection under U.S. Bankruptcy Codes. In a prepackaged bankruptcy, a firm negotiates a reorganization plan with its creditors prior to filing for bankruptcy. This can result in a much quicker exit from bankruptcy than traditional bankruptcy filings. A study of 49 prepackaged bankruptcies was published in Financial Management (Spring 1995). For each firm, information was collected on the time (in months) in bankruptcy as well as the results of the board of directors’ vote on the type of reorganization plan. Three types of plans were studied: “Joint”—a joint exchange offer with prepackaged bankruptcy solicitation; “Prepack”—prepackaged bankruptcy solicitation only; and “None”—no pre-filing vote held. The data for the 49 firms is provided in the accompanying table
a. Construct a stem-and-leaf display for the length of time in bankruptcy for all 49 companies.
b. Summarize the information reflected in the stem-and-leaf display from part a. Make a general statement about the length of time in bankruptcy for firms using “prepacks.”
c. Select a graphical method that will permit a comparison of the time-in-bankruptcy distributions for the three types or reorganization plans.
d. Firms that were reorganized through a leveraged buyout are identified by an asterisk in the table. Mark these firms on the stem-and-leaf display, part a, by circling their bankruptcy times. Do you observe any pattern in the graph? Explain

Short Answer

Expert verified

a.)

b. The firms that are using “pre-packs” have a lesser length of time in bankruptcy than the firms that are not using “pre-packs.”

Step by step solution

Given information

The data for the 49 firms is given in the following table.

(a) Constructing Stem and leaf diagram

Step and leaf diagram (N=49)

Leaf unit = 0.10

(b) Summarizing the stem and leaf diagram

The companies spent less than 2 months in bankruptcy is $\frac{26}{49} = 0.53$ . More than half of the companies spent less than 2 months in bankruptcy.

Among 49 companies, two companies spent more than 6 months in bankruptcy. The firms that are using “pre-packs” have a lesser length of time in bankruptcy than those that are not using “pre-packs.”

(c) Constructing dot plot of time versus plan

The above plot shows that the length of time in bankruptcy is highest for companies using “pre-packs.”

(d) Explaining the stem and leaf diagram

The bold and underlined value of the above stem and leaf plot shows the length of the time for the reorganized firms through a leveraged buyout.

The above figure shows that the plans seem to be scattered and distributed throughout the times. Hence, there does not exist any pattern in the graph.