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4. Pierre Imports will be liquidated. Its current balance sheet is shown below. Fixed assets are sold for $900,000 and current assets are sold for $700,000. All fixed assets are pledged as collateral for mortgage bonds. Subordinated debentures are subordinate only to notes payable. Trustee costs are $70,000.

Sale of current assets 700,000
Sale of fixed assets 900,000
Trustee costs 70,000

Before Before
Default Balance Sheet Default
Current Assets 1,260,000 Accounts payable 300,000
Net fixed assets 1,200,000 Accrued taxes 40,000
Accrued wages 25,000
Notes payable 45,000
Total current liabilities 410,000
First-mortgage bonds 600,000
Second-mortgage bonds 400,000
Debentures 500,000
Subordinated debentures 300,000
Common stock 200,000
Retained earnings 50,000
Total assets 2,460,000 Total claims 2,460,000

a. How much will SHs 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?

e. How much will each general creditor receive after subordination adjustment?

5. Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares outstanding and a target capital structure consisting of 40 percent debt. Tantrell's debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the market risk premium is 7 percent.

Tantrell's free cash flow (FCF0) is $3 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Tantrell has $5 million in debt. The tax rate for both companies is 30 percent.

a. Calculate the required rate of return on equity using equation: rs= KRF + RPM(b)
b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs
c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)
d. Calculate the value of the company's equity, using equation: Vs = Vops - debt
Calculate the current value of the company's stock, using equation:
Price per share = Vs/shares outstanding

6.Exchange rates for several countries are shown below. The MLC Company does business with companies in those countries.

U.S. Dollar / Japanese yen British Pound / U.S. Dollar U.S. Dollar / Mexican Peso
Spot 115 1.81 11.1
30-day forward 112 1.82 11.3
90-day forward 110 1.84 11.4
180-day forward 108 1.845 11.5

a. Is the U.S. dollar appreciating or depreciating against the Japanese yen? Explain.

b. Is the U.S. dollar appreciating or depreciating against the British pound? Why?

c. B. Is the U.S. dollar appreciating or depreciating against the Mexican peso? Why?

d. The U.S. company orders merchandise from companies in Japan, Britain, and Mexico, and pays in the foreign currency of each country at the end of 3 months. From a foreign exchange standpoint, would it be to the advantage of the U.S. company to pay now instead of waiting 3 months? Why or why not?

e. Who bears the foreign exchange risk, the U.S. company or the foreign suppliers? Explain.

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Solution Summary

This is a series of accounting finance questions regarding liquidation of a company, acquisition of a company, and exchange rates.

Solution provided by:
  • B.Com, University of Ajmer
  • M.Com, University of Ajmer
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