Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecure

Question

Magic Mobile Homes is to be liquidated. All creditors, both secured and unsecured, are owed $2 million. Administrative costs of liquidation and wage payments are expected to be $500,000. A sale of assets is expected to bring $1.8 million after taxes. Secured creditors have a mortgage lien for $1,200,000 on the factory which will be liquidated for $900,000 out of the sale proceeds. The corporate tax rate is 34%.

How much and what percentage of their claim will the unsecured creditors receive, in total?

Explanation / Answer

Mortgage unsecured = $1,200,000 - $900,000 = $300,000.

Net proceeds remaining = Sales Value of asset - Administrative Cost - Secured Creditors

                                           = 18 00 000- 5,00,000 - 900,000 = $400,000.

Unsecured received = ($800,000/$1,100,000)($400,000) = $290,909.09

% Received = $209,909.09 / $800,000 = 36.36%.

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