A petition for the reorganization of the Boniface Company has been filed under t

Question

A petition for the reorganization of the Boniface Company has been filed under the Insolvency Act. The trustees estimate the firm's liquidation value, after considering costs, is $125 million. Alternatively, the trustees, using the analysis of the Zulu Consulting firm, predict that the reorganized business will generate $19 million annual cash flows in perpetuity. The discount rate is 14 percent.

Should Boniface be liquidated or reorganized?

A.Reorganized, since $135.71 M alive is more than $125 M liquidation value B.Liquidated, since the firm is worth more dead than alive C.I do not know the Insolvency Act, thus, I am choosing this answer D.Liquidated, since $125 M liquidation value is more than $2.66 M current value

Explanation / Answer

If the firm is liquidated $ 125 M will be received immediately, however if it is reorganised then annual annuity of $ 19 M shall be received perpetually. The Present value of all such cash flows works out to be $ 135.71 M which is greater than if liquidated. Thus they should opt to reorganize the firm.

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