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. Past which recovery rate would common stock investors start to receive proceeds from the liquidation process?

37%

50%

67%

83%

37%

50%

67%

83%

Explanation / Answer

Proceeds from total assets = 100 Million - Liquidation cost

= 100 million - 10 million i.e 90 million

Amount left over for common stockholders = 90 million -45million-12 million i.e 33 million

Recovery rate for common stockholders investors = 33 million /65million i.e 50 percent

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