Problem:
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying unsuccessfully to reorganize the firm, decided that the only recourse was liquidation. 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. Trustee's costs amounted to $50,000; no single worker was due more than $2,000 in wages; and there were not unfunded pension plan liabilities.
A. How much will McDaniel's shareholders receive from the liquidation?
B. How much will the mortgage bondholders receive?
C. Who are the other priority claimants in addition to the mortgage bondholders? How much will they receive from the liquidation?
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?
| Current Assets |
$400 |
Accts. 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 |