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 under Chapter 7. 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 sales were $600,000. Trustee’s costs amounted to $50,000; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities. (see attachment)
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 under Chapter 7. 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 sales were $600,000. Trustee’s costs amounted to $50,000; no single worker was due more than $2,000 in wages; and there were no unfunded pension plan liabilities.
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Current assets |
$400 |
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Net fixed assets |
600 |
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Total assets |
$1,000 |
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Liabilities and equity |
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Accounts payable |
$50 |
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Accrued taxes |
40 |
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Accrued wages |
30 |
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Notes payable |
180 |
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Total current liabilities |
$300 |
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First-mortgage bondsa |
300 |
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Second-mortgage bondsa |
200 |
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Debentures |
200 |
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Subordinated debenturesb |
100 |
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Common stock |
50 |
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Retained Earnings |
(150) |
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Total claims |
$1,000 |
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a All fixed assets are pledged as collateral to the mortgage bonds. |
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b Subordinated to notes payable only. |
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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?
