Finance Group Assignment Week 13 Bab 22

Financial Management
Group 2
Drahat T. Situmorang / Kosmas Risandro Wanarde / Rahman Armenzaria
22-1. 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?
Answer:
Proceeds from sales of assets $ 2,500,000

Trustee’s costs (281,250)
Cash to be distributed 2,218,750
To Creditors:
Account payables 375,000
Notes payables 750,000
Subordinated debentures 750,000
Total 1,875,000
To Stockholders 343,750
22-3. At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining
Company had the balance sheet shown below (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. The 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?
Answer:
Claim for creditors

Current liabilities $300
First mortgage bonds 300
Second mortgage bonds 200
Debentures 200
Subordinated debentures 100
Total 1,100
Proceeds from liquidation sale 600

Trustee’s costs (50)
Cash to be distributed 550
As seen above, the amount of cash to be distributed is less than the total claims for creditors; therefore,
shareholders will not receive any remaining cash from the liquidation.
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Group 2
b. How much will the mortgage bondholders receive?
Answer:
Sales of fixed assets $400

Claims:
First mortgage holders 300
Remaining 100
Second mortgage holders 200
Unsatisfied claims 100
The first mortgage holders will receive full cash of their claims, meanwhile the second mortgage holders
will receive only $100 thousands of the claims. The remaining unsatisfied claims will be converted into
general creditors’ claims.
c. Who are the other priority claimants (in addition to the mortgage bondholders)? How much
will they receive from the liquidation?
Answer:
Besides the mortgage holders, the other priority claimants are the trustee, the workers, and the tax to
be paid to the government. Other creditors besides the one which have been mention here are
considered general claimants.
These priority claimants will receive the proceeds from sales of current assets which amounted to $200
thousands.
Proceeds from sales of current assets $200

Priority claimants:
Trustee’s costs 50
Wages due to workers 30
Taxes due to government 40
Total 120
Remaining to be distributed to general creditors 80
Group 2
d. Who are the remaining general creditors? How much will each receive from the distribution
before subordination adjustment? What is the effect of adjusting for subordination?
Answer:
The remaining distribution for general creditors are as follow:
General creditors’ Amount of claims Pro Rata Distribution After Percentage of

claims: Distributiona Subordination Original Claim
Adjustmentb Received
Unsatisfied second $100 $12.69 $12.69 56.34%
mortgage holders
Account payables 50 6.34 6.34 12.69%
Notes payables 180 22.84 35.53 19.73%
Debentures 200 25.38 25.38 12.69%
Subordinated 100 12.69 0 0%
debentures
Total claims 630 80 80
a
The remaining funds available for distribution to general creditors is $80 thousand. Therefore, pro rata
distribution will be 80/630=0.1269 or 12.69%.
b
Debentures are subordinate to notes payable; therefore, the entire $12.69 thousands will be
reallocated to notes payables.
22-4. The following balance sheet represents Boles Electronics Corporation’s position at the time it
filed for bankruptcy (in thousand of dollars);
Cash $ 10
Account payable 1600
Receivables 100
Notes payable 500
Inventories 890
Wages payable 150
Taxes payable 50
Total current assets 1000 Total current liabilities 2300
Net Plant 4000 Mortgage bonds 2000
Net equipment Subordinate
5000 2500
debentures
Preferred stock 1500
Common stock 1700
Total assets 10000 Total claims 10000
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):
Group 2
Assets Proceeds
Plant $1600
Equipment 1300
Receivables 50
Inventories 240
Total 3190
In addition, the firm had $10.000 in cash available for distribution. No single wage earner had
over $2000 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 stock holders receive any
distributions?
The total amount available for distribution is $3,190,000 proceeds + $10,000 cash =
$3,200,000. The total creditor and trustee claims are $6,800,000 + $200,000 =
$7,000,000. Since the claims far exceed the available funds, preferred and common
stockholders will receive nothing.
b. Determine the dollar distribution to each creditor and to the trustee. What percentage of
each claim is satisfied?
Priority Creditor Subordination
Claimant Distribution Distribution Adjustment Percentage
Accounts payable $ 384 $ 384 24%
Notes payable 120 500 100
Wages payable $ 150 150 150 100
Taxes payable 50 50 50 100
Mortgage bonds 1,600 1,696 1,696 85
Subordinated
Debentures 600 220 9
Trustee 200 200 200 100
$2,000 $3,200 $3,200
 Funds remaining after the priority distribution = $3,200 - $2,000 = $1,200.

 General creditor claims total $1,600 + $500 + $400 + $2,500 = $5,000.
 After the general creditor distribution, notes payable is $500 - $120 = $380 short.
Therefore, subordinated debentures must give up $380, leaving $600 - $380 =
$220.
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Finance Group Assignment Week 13 Bab 22

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Financial Management

Proceeds from sales of assets $ 2,500,000

a. How much will McDaniel’s shareholders receive from the liquidation?

Claim for creditors

Proceeds from liquidation sale 600

b. How much will the mortgage bondholders receive?

Sales of fixed assets $400

Proceeds from sales of current assets $200

The remaining distribution for general creditors are as follow:

General creditors’ Amount of claims Pro Rata Distribution After Percentage of

 Funds remaining after the priority distribution = $3,200 - $2,000 = $1,200.

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