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Financial Management: Theory and Practice

Eugene F. Brigham, Michael C. Ehrhardt

Chapter 24

Bankruptcy, Reorganization, and Liquidation - all with Video Answers

Educators

Chapter Questions

01:04

Problem 1

Southwestern Wear Inc. has the following balance sheet:
The trustee's costs total $\$ 281,250,$ and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $\$ 2.5$ million is received from sale of the assets?

Zach Steedman
Zach Steedman
Numerade Educator
02:04

Problem 2

The Verbrugge Publishing Company's 2007 balance sheet and income statement are as follows (in millions of dollars). Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $\$ 6$ preferred will be exchanged for one share of $\$ 2.40$ preferred with a par value of $\$ 37.50$ plus one $8 \%$ subordinated income debenture with a par value of $\$ 75 .$ The $\$ 10.50$ preferred issue will be retired with cash.
a. Construct the pro forma balance sheet assuming that reorganization takes place. Show the new preferred stock at its par value.
b. Construct the pro forma income statement. What is the income available to common shareholders in the proposed recapitalization?
c. $\quad$ Required earnings is defined as the amount that is just enough to meet fixed charges (debenture interest and/or preferred dividends). What are the required pre-tax earnings before and after the recapitalization?
d. How is the debt ratio affected by the reorganization? If you were a holder of Verbrugge's common stock, would you vote in favor of the reorganization?

Carson Merrill
Carson Merrill
Numerade Educator
04:07

Problem 3

At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under Chapter $7 .$ Sale of the fixed assets, which were pledged as collateral to the mortgage bondholders, brought in $\$ 400,000$ while the current assets were sold for another $\$ 200,000$. Thus, the total proceeds from the liquidation sale were $\$ 600,000$. Trustee's costs amounted to $\$ 50,000 ;$ no single worker was due more than $\$ 2,000$ in wages; and there were no unfunded pension plan liabilities.
a. How much will McDaniel's shareholders receive from the liquidation?
b. How much will the mortgage bondholders receive?
c. Who are the other priority claimants in addition to the mortgage bondholders? How much will they receive from the liquidation?
d. Who are the remaining general creditors? I low much will each receive from the distribution before subordination adjustment? What is the effect of adjusting for subordination?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:52

Problem 4

The following balance sheet represents Boles Electronics Corporation's position at the time it filed for bankruptcy (in thousands of dollars):
The mortgage bonds are secured by the plant, but not by the equipment. The subordinated debentures are subordinated to notes payable. The firm was unable to reorganize under Chapter $11 ;$ therefore, it was liquidated under Chapter $7 .$ The trustee, whose legal and administrative fees amounted to $\$ 200,000,$ sold off the assets and received the following proceeds (in thousands of dollars):
In addition, the firm had $\$ 10,000$ in cash available for distribution. No single wage earner had over $\$ 2,000$ in claims, and there were no unfunded pension plan liabilities.
a. What is the total amount available for distribution to all claimants? What is the total of creditor and trustee claims? Will the preferred and common stockholders receive any distributions?
b. Determine the dollar distribution to each creditor and to the trustee. What percentage of each claim is satisfied?

Adriano Chikande
Adriano Chikande
Numerade Educator
02:10

Problem 5

Start with the partial model in the file $F M 12$ Ch 24 P05 Build a Model.xls at the textbook's Web site. Use the information and data from Problem $24-4$, except assume that the fixed assets can be sold for $\$ 450,000$ and that the current assets can be sold for $s 250,000$. Determine the amounts available for distribution to each claimant.

JD
Jeffrey Doucette
Numerade Educator