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Liquidation: how much will creditors & shareholders receive

Tundra Tots is being liquidated under Chapter 7 of the Bankruptcy Act. Its current balance sheet is shown below. Fixed assets are sold for $25,000,000 and current assets are sold for $18,000,000. All fixed assets are pledged as collateral for mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $500,000. No employee is owed over $2,000.

Before Before
Default Balance Sheet Default
Current Assets 26,000,000 Accounts payable 4,000,000
Net fixed assets 50,000,000 Accrued taxes 90,000
Accrued wages 250,000
Notes payable 1,650,000
Total current liabilities 5,990,000
First-mortgage bonds 18,000,000
Second-mortgage bonds 20,000,000
Debentures 15,000,000
Subordinated debentures 14,000,000
Common stock 2,500,000
Retained earnings 510,000
Total assets 76,000,000 Total claims 76,000,000

a. How much will Shareholders receive?

b. How much will mortgage bondholders receive?

c. How much will priority creditors receive?

d. Identify the remaining general creditors. How much will each receive before subordination adjustment and after adjustment?

Solution Summary

The solution explains how to calculate the amount that the creditors and shareholders would receive under liquidation