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?
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The solution explains some questions relating to bankruptcy
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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 ...
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