Purple Whale Foodstuiffs has been in financial distress for the past three years

Question

Purple Whale Foodstuiffs has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Purple whale Foodstuffs to liquidate its assets and settle creditor claims Th e court appointed the trustee with an estimated expense budget of $984,375. Subordinated debentures are subordinated only to the notes payable. Purple Whale Foodstuffs Balance Sheet (Thousands of dollars) $6,563 Accounts payable Current assets Net fixed assets $1,313 2,625 2.625 6,563 6,563 $13,126 6,563 Notes payable Subordinated debentures Total debt Common equity $13,126 Total liabilities and equity Total assets The trustee has arranged the sale of Purple Whale Foodstuffs's assets and estimates to receive s8.75 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Purple whale Foods of distribution of assets to various claimants, how much all) when Purple whale Foodstuffs is liquidated? … tuffs's liabilities. Based on your understanding will common stockholders receive (if they receive anything at O $1,202,625 O $2,187,000 O $1,322,888 O $2,515,625 The bankruptcy courts and the company have discretion in how they elect to handle a failing firm, Just as the decision to reorganize or liquidate the firm depends on the relationship between its going concem and its liquidatio values, the significance and competitiveness of the industry in which the failing firm operates also affects the court's decision. If Purple Whale Foodstuffs were a public utility company or a railroad service company instead of an industrial corporation, the bankruptcy courts would likely push for: O Liquidation O Reorganization

Explanation / Answer

Question (1) Debtholders have the first right

Total debtholders = 1,313,000 +2,625,000 +2,625,000 = 6,563,000

Remianing for shareholders = 8,750,000 -6.563,000 = 2,187,000 (Option b)

Question (2) Reorganization since railroad (utility) and industrial corporation can be turned around more easily over long periods of time.

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