Suppose that a recently-healthy firm has just defaulted, has been liquidated, an

Question

Suppose that a recently-healthy firm has just defaulted, has been liquidated, and where the firm's assets were worth $100 million before the liquidation. Also suppose that the firm had, at the time of its liquidation, $12 in preferred stock claims, $45 million in debt claims, $65 million in common stock claims, and that the liquidation process racked up a total of $10 million in legal and administrative expenses. Finally, suppose that the firm was able to recover 100% of the firm's value in liquidation (i.e. $100 million). How much money would common shareholder get in aggregate post-liquidation?

$0 million

$13 million

$23 million

$33 million

$0 million

$13 million

$23 million

$33 million

Explanation / Answer

Balance available to equity share holders   d. $ 33 Million

Amount Recovered from Assets on Liquidation = $ 100 Million

Less  

Debt Claims                                                                = $ 45 Million

Balance available after clearing debt claims       =   $ 55 Million

Less

Legal and Administrative Expenses                      = $ 10 Million

Balance available                                                     = $ 45 Million

Less

Preferred stock claims                                            = $ 12 Million

Balance available to Equity share holders         = $ 33 Million  

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