Problem #3 (Bankruptcy Pecking Order)
Please give step by step answers
At the time it defaulted on its interest payments and filed forbankruptcy, the McDaniel Mining Company had the following balancesheet (in thousands of dollars). The court, after tryingunsuccessfully to reorganize the firm, decided that the onlyrecourse 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. Trusteeâs costs amounted to $50,000; no single worker wasdue more than $2,000 in wages; and there were no unfunded pensionplan liabilities.
a.)How much will McDanielâsshareholders receive from the liquidation?
b.)How much will the mortgagebondholders receive?
c.)Who are the other priorityclaimants in addition to the mortgage bondholders? How much willthey receive from the liquidation?
d.)Who are the remaining generalcreditors? How much will each receive from the distribution beforesubordination adjustment? What is the effect of adjusting forsubordination?
Current assets
$400
Accounts payable
$50
Net fixed assets
600
Accrued taxes
40
Accrued wages
30
Notes payable
180
Total current liabilities
$300
First-mortgage bonds
300
Second-mortgage bonds
200
Debentures
200
Subordinated debentures
100
Common stock
50
Retained earnings
(150)
Total assets
$1,000
Total claims
$1,000
Problem #3 (Bankruptcy Pecking Order)
Please give step by step answers
At the time it defaulted on its interest payments and filed forbankruptcy, the McDaniel Mining Company had the following balancesheet (in thousands of dollars). The court, after tryingunsuccessfully to reorganize the firm, decided that the onlyrecourse 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. Trusteeâs costs amounted to $50,000; no single worker wasdue more than $2,000 in wages; and there were no unfunded pensionplan liabilities.
a.)How much will McDanielâsshareholders receive from the liquidation?
b.)How much will the mortgagebondholders receive?
c.)Who are the other priorityclaimants in addition to the mortgage bondholders? How much willthey receive from the liquidation?
d.)Who are the remaining generalcreditors? How much will each receive from the distribution beforesubordination adjustment? What is the effect of adjusting forsubordination?
Current assets | $400 | Accounts payable | $50 |
Net fixed assets | 600 | Accrued taxes | 40 |
Accrued wages | 30 | ||
Notes payable | 180 | ||
Total current liabilities | $300 | ||
First-mortgage bonds | 300 | ||
Second-mortgage bonds | 200 | ||
Debentures | 200 | ||
Subordinated debentures | 100 | ||
Common stock | 50 | ||
Retained earnings | (150) | ||
Total assets | $1,000 | Total claims | $1,000 |
