Financial Management

Group 2
Drahat T. Situmorang / Kosmas Risandro Wanarde / Rahman Armenzaria

22-1. The trustee’s costs total $281,250, and the firm has no accrued taxes or wages. The debentures
are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much
will each class of investors receive if a total of $2.5 million is received from sale of the assets?

Answer:

Proceeds from sales of assets $ 2,500,000

Trustee’s costs (281,250)
Cash to be distributed 2,218,750
To Creditors:
Account payables 375,000
Notes payables 750,000
Subordinated debentures 750,000
Total 1,875,000
To Stockholders 343,750

22-3. At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining
Company had the balance sheet shown below (in thousands of dollars). The court, after trying
unsuccessfully to reorganize the firm, decided that the only recourse was liquidation under
Chapter 7. Sale of the fixed assets, which were pledged as collateral to the mortgage
bondholders, brought in $400,000, while the current assets were sold for another $200,000.
Thus, the total proceeds from the liquidation sale were $600,000. The trustee’s costs amounted
to $50,000; no single worker was due more than $2,000 in wages; and there were no unfunded
pension plan liabilities.

a. How much will McDaniel’s shareholders receive from the liquidation?

Answer:

Claim for creditors

Current liabilities $300
First mortgage bonds 300
Second mortgage bonds 200
Debentures 200
Subordinated debentures 100
Total 1,100

Proceeds from liquidation sale 600

Trustee’s costs (50)
Cash to be distributed 550

As seen above, the amount of cash to be distributed is less than the total claims for creditors; therefore,
shareholders will not receive any remaining cash from the liquidation.
 Financial Management
Group 2
Drahat T. Situmorang / Kosmas Risandro Wanarde / Rahman Armenzaria

b. How much will the mortgage bondholders receive?

Answer:

Sales of fixed assets $400

Claims:
First mortgage holders 300
Remaining 100
Second mortgage holders 200
Unsatisfied claims 100

The first mortgage holders will receive full cash of their claims, meanwhile the second mortgage holders
will receive only $100 thousands of the claims. The remaining unsatisfied claims will be converted into
general creditors’ claims.

c. Who are the other priority claimants (in addition to the mortgage bondholders)? How much
will they receive from the liquidation?

Answer:

Besides the mortgage holders, the other priority claimants are the trustee, the workers, and the tax to
be paid to the government. Other creditors besides the one which have been mention here are
considered general claimants.

These priority claimants will receive the proceeds from sales of current assets which amounted to $200
thousands.

Proceeds from sales of current assets $200

Priority claimants:
Trustee’s costs 50
Wages due to workers 30
Taxes due to government 40
Total 120
Remaining to be distributed to general creditors 80
 Financial Management
Group 2
Drahat T. Situmorang / Kosmas Risandro Wanarde / Rahman Armenzaria

d. Who are the remaining general creditors? How much will each receive from the distribution
before subordination adjustment? What is the effect of adjusting for subordination?

Answer:

The remaining distribution for general creditors are as follow:

General creditors’ Amount of claims Pro Rata Distribution After Percentage of

claims: Distributiona Subordination Original Claim
b
Adjustment Received
Unsatisfied second $100 $12.69 $12.69 56.34%
mortgage holders
Account payables 50 6.34 6.34 12.69%
Notes payables 180 22.84 35.53 19.73%
Debentures 200 25.38 25.38 12.69%
Subordinated 100 12.69 0 0%
debentures
Total claims 630 80 80

a
The remaining funds available for distribution to general creditors is $80 thousand. Therefore, pro rata
distribution will be 80/630=0.1269 or 12.69%.
b
Debentures are subordinate to notes payable; therefore, the entire $12.69 thousands will be
reallocated to notes payables.