You observe a firm that is in trouble. It is not paying its bondholders and is g

Question

You observe a firm that is in trouble. It is not paying its bondholders and is going bankrupt. The bondholders, who are in control, are trying to decide on whether to force the firm to file for Chapter 7 or Chapter 11 bankruptcy. The bondholders have hired you to provide your opinion on the matter. You are provided with the following information:

Inventories and property, plant, and equipment are the firm's only assets. Inventories have a market value (market value is also the liquidation value) of 50 and balance sheet value (balance sheet value is also called book value) of 80. Property, plant and equipment have a balance sheet value of 20, but are worth 0 if liquidated. Liabilities to bondholders are 90 on the balance sheet and equity is 10 on the balance sheet. If the firm can be restructured and some liabilities forgiven, the firm would have a value of 40 based on the present value of its future cash flows.

Please mark the correct answer.

a. It is better for bondholders if the firm files for Chapter 11 bankruptcy than if it filed for Chapter 7 bankruptcy. b. If the firm files Chapter 11 bankruptcy, the bondholders will lose 50 from their initial value on the balance sheet. c. If the firm is liquidated, bondholders will receive 40 through the value of the firm. d. Equity holders will likely receive 10 if the firm files for bankruptcy. e. The value of the firm based on the present value of future cash flows after restructuring debt is higher than the liquidation value of the assets. You observe a firm that is in trouble. It is not paying its bondholders and is going bankrupt. The bondholders, who are in control, are trying to decide on whether to force the firm to file for Chapter 7 or Chapter 11 bankruptcy. The bondholders have hired you to provide your opinion on the matter. You are provided with the following information: Inventories and property, plant, and equipment are the firm's only assets. Inventories have a market value (market value is also the liquidation value) of 50 and balance sheet value (balance sheet value is also called book value) of 80. Property, plant and equipment have a balance sheet value of 20, but are worth 0 if liquidated. Liabilities to bondholders are 90 on the balance sheet and equity is 10 on the balance sheet. If the firm can be restructured and some liabilities forgiven, the firm would have a value of 40 based on the present value of its future cash flows. Please mark the correct answer.

Explanation / Answer

E is the correct answer

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