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    Bankruptcy

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    Individual: Bankruptcy
    a) Problem 30.3 (p. 56): Propose a distribution of assets consistent with the absolute priority rule.

    b) Problem 30.4 (p. 56): Propose a distribution of assets consistent with the absolute priority rule.

    c) Delphi Corporation Assignment

    i) Delphi, an automobile supply firm in Chapter 11 bankruptcy, asked the bankruptcy court for permission to cancel its contracts with their labor unions and cut wages. The United Auto Workers union threatened to strike if the permission was granted. On the date of the request, the market price of Delphi bonds rose by 6.6%.

    (1) Who gained and who lost as a result of this action? Explain the rational behind the gains and losses.

    (2) Is this request consistent with the absolute priority rule? The absolute priority rule was developed to handle liquidation of assets, and in a strict sense, it does not apply in cases like this. Is there any reason that it might be used as a standard nonetheless?

    (3) Do you think Delphi's request is ethical? Why or why not? Do you think the threat of the union is ethical? Why or why not?

    d) Delta Airlines Assignment

    i) Delta Air Lines filed for voluntary bankruptcy in September of 2005. Summary data from their financial statements is below. Some of the columns may not add up because the financial statements are not complete, but they contain all the information needed to do this problem.

    ii) Using this data, select the appropriate version of Altman's Z-score model, and calculate the z-score for this firm over each of the past five years. Write a brief analysis of the predictive power of this model, as illustrated by the Delta example.

    Delta Air Lines
    ($millions)

    2005
    2004
    2003
    2002
    2001

    Income Statement

    Sales Revenue
    16191
    15235
    14308
    13866
    13879

    Cost of Sales
    14268
    13814
    12499
    12360
    12281

    Gross Profit
    880
    476
    999
    896
    1189

    Operating Expenses
    3764
    3806
    1793
    2286
    2723

    EBIT
    -2884
    -3330
    -794
    -1390
    -1534

    Non-Op. Expenses
    975
    666
    405
    652
    330

    NIAT
    -3818
    -5198
    -773
    -1272
    -1216

    Balance Sheet

    Current Assets
    4480
    3606
    4550
    3902
    3567

    Fixed Assets
    15559
    18196
    21389
    20818
    20038

    Total Assets
    20039
    21801
    25939
    24720
    23605

    Current Liabilities
    5265
    5941
    6157
    6455
    6403

    Long Term Debt
    24422
    21379
    20166
    17108
    13178

    Common Stock
    2
    286
    271
    271
    271

    Paid-in Surplus
    1635
    3052
    3272
    3263
    3267

    Retained Earnings
    -8209
    -4373
    844
    1639
    2930

    Total Liab & Equity
    20039
    21801
    25939
    24720
    23605

    e) The bankruptcy of New Era Philanthropy provides an example where the legal and administrative costs associated with bankruptcy were minimal. What factors associated with this particular case made this resolution possible? Do you think this type of settlement is possible in other cases? Why or why not?

    © BrainMass Inc. brainmass.com May 20, 2020, 7:56 pm ad1c9bdddf
    https://brainmass.com/business/financial-distress-and-bankruptcy/individual-bankruptcy-problem-366998

    Attachments

    Solution Preview

    Please see the attachment. The excel file has the Z score calculation.

    Individual: Bankruptcy
    a) Problem 30.3 (p. 56): Propose a distribution of assets consistent with the absolute priority rule.

    The absolute priority rule states that first the senior claims are to be satisfied and then the junior claims are to received if anything is left.
    In this question
    The net realizable assets are $5,000
    First claim to be satisfied would be the secured notes which are secured by the mortgage. These lenders would get $1,000
    Next would be senior debenture who would get $3,000.
    The remaining $1,000 would be given to trade credit of $1,000.
    Equity holders and junior debenture holders would not get anything

    b) Problem 30.4 (p. 56): Propose a distribution of assets consistent with the absolute priority rule.

    In this case the assets are worth $15,000
    First distribution would be to mortgage bonds who get $10,000.
    The remaining $5,000 would go to senior debentures
    The junior debentures and equity holders would not get anything

    c) Delphi Corporation Assignment

    i) Delphi, an automobile supply firm in Chapter 11 bankruptcy, asked the bankruptcy court for permission to cancel its contracts with their labor unions and cut wages. The United Auto Workers union threatened to strike if the permission was granted. On the date of the request, the market price of Delphi bonds rose by 6.6%.

    (1) Who gained and who lost as a result of this action? Explain the rational behind the gains and losses.

    The price of bonds rose so the bondholders benefited and the workers would have lost as their wages would be cut.
    The rationale would be that with the cut in wages, the company would be able to come out of bankruptcy and so the bonds value bow would be higher and the risk of non payment is lower.
    The workers would have lost ...

    Solution Summary

    The solution explains some questions relating to bankruptcy

    $2.19

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