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A B C D E F G H
Chapter 24. Mini Case for Bankruptcy, Reorganization, and Liquidation
Kimberly MacKenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is
worried. Her firm has been selling clothes to Russ Brothers Department Store for more than ten years, and she
has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers
owes Kim's Clothes $65,000 for spring sportswear that was delivered to the store just two weeks ago. Kim's
concern was brought about by an article that appeared in yesterday's Wall Street Journal that indicated that Russ
Brothers was having serious financial problems. Further, the article stated that Russ Brothers' management was
considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
entire board of directors. In turn, Ron asked you, a newly hired financial analyst, to do the groundwork for the
briefing by answering the following questions:
h. Assume that Russ Brothers did indeed fail, and that it had the following balance sheet when it was liquidated
(in millions of dollars):
b. What key issues must managers face in the financial distress process?
Answer: See Chapter 24 Mini Case Show
c. What informal remedies are available to firms in financial distress? In answering this question, define the
following terms: (1) Workout; (2) Restructuring; (3) Extension; (4) Composition; (5) Assignment; and (6) Assignee
e. What are the major differences between an informal reorganization and reorganization in bankruptcy? In
answering this question, be sure to discuss the following items: (1) Common pool problem; (2) Holdout problem;
(3) Automatic stay; (4) Cramdown; and (5) Fraudulent conveyance. Answer: See Chapter 24 Mini Case Show
a. (1.) What are the major causes of business failure? Answer: See Chapter 24 Mini Case Show
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A B C D E F G H
Current assets $40.00 Accounts payable $10.00
Net fixed assets 5.0 Notes payable (to banks) 5
Accrued wages 0.3
Federal taxes 0.5
State and local taxes 0.2
Current liabilities $16.00
First mortgage $3.00
Second mortgage 0.5
Subordinated debenturesa4
Total long-term debt $7.50
Preferred stock $1.00
Common stock 13
The liquidation sale resulted in the following proceeds:
Priority Distribution (millions of $)
Creditor Claim Distribution Unsatisfied
Accrued Wages 0.3 0.3 0.0
Federal Taxes 0.5 0.5 0.0
(1) First mortgage receives entire proceeds from sale of fixed assets, leaving $0 for the second mortgage.
(2) $16.5 - $3.5 = $13.0 remains for distribution to general creditors.
General Creditor Distribution (millions of $)
Other Taxes 0.0 0.2 100.0%
First Mortgage 0.5 0.325 2.825 94.2%
Second Mortgage 0.5 0.325 0.325 65.0%
$14,000,000
2,500,000
From sale of current assets
From sale of fixed assets
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A B C D E F G H
Sub. Debt 4.0 2.6 0.85 21.3%
20.0 13.0 16.5
a Pro rata amount = $13/$20 = 0.65.
b Includes priority distribution and $1.75 transfer from subordinated debentures.
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I
10/28/2015
Kimberly MacKenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is
worried. Her firm has been selling clothes to Russ Brothers Department Store for more than ten years, and she
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I
For simplicity, assume that there were no trustee's fees or any other claims against the liquidation proceeds. Also,
assume that the mortgage bonds are secured by the entire amount of fixed assets. What would each claimant
receive from the liquidation distribution?
