At the time it defaulted on its interest payments and filed for bankruptcy, the

Question

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 asset, which were pledged as collateral to the mortgage bondholders, brought in $400,000, while the current asset 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?
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? How much will each receive from the distribution before subordination adjustment? What is the effect of adjusting for subordination?

Current assets Net fxed assets 400 Accounts payable 600 Accrued taxes 50 40 30 180 S 300 300 200 200 100 50 150) $1,000 Accrued wages Notes payable Total ourrent liabiliies First-I Second-mcrtgage bonds Subordinated dzbenturesb Common stock Retained earnings Total assets $1,000 Total claims d All fixed assets are pledged as collateral to the mortgnge bonds Subordinated to notes payable only

Explanation / Answer

a. How much will McDaniel's shareholders receive from the liquidation? (in'000)

Answer= total proceeds - liability

= proceeds from current assets + fixed assets - current liability - bonds - debentures

= $600 - $300 - $300 - $200 - $200 - $100

= ($500)

b) How much will the mortgage bondholders receive?

answer = mortgage secured against fixed assets + proportion of other liability

= $400000 + $100000/$400000 * ($200000-$70000)

= $325000

c. Who are the other priority claimants (in addition to the mortgage bondholders)? How much will they receive from the liquidation?

Answer = debenturesholders

they would receive proportion share i.e = $300000/$400000 * $130000

= $97500

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 = account payable and note payable

they will receive after payment of preferential creditors

first right to recieve payment is with accrued taxes and wages and balance is distributed among the other debt holders

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.