Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1
2
3
4
5
6
7
8
9
10
11
12
20
21
22
23
26
27
29
30
32
33
36
37
38
40
41
42
43
45
46
50
51
52
53
54
55
56
57
A B C D E F G H I
12/10/2012
Current assets $40.00 Accounts payable $10.00
Net fixed assets 5.0 Notes payable (to banks) 5
Accrued wages 0.3
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.
(3) Which size of firm, large or small, is more prone to business failure?
h. Assume that Russ Brothers did indeed fail, and that it had the following balance sheet when it was liquidated (in
millions of dollars):
d. Briefly describe U.S. bankruptcy law, including the following terms: (1) Chapter 11; (2) Chapter 7; (3) Trustee; (4)
b. What key issues must managers face in the financial distress process?
c. What informal remedies are available to firms in financial distress? In answering this question, define the following
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
f. What is a prepackaged bankruptcy? Why have prepackaged bankruptcies become more popular in recent years?
a. (1.) What are the major causes of business failure? Answer: See Chapter 24 Mini Case Show
65
66
67
73
74
75
76
77
78
79
80
81
82
83
84
85
86
93
94
95
96
97
98
99
100
101
102
103
111
112
113
A B C D E F G H I
Preferred stock $1.00
Common stock 13
Paid-in capital 2
The liquidation sale resulted in the following proceeds:
Priority Distribution (millions of $)
Creditor Claim Distribution Unsatisfied
Notes:
(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 $)
Creditor Final Amount % Received
Accounts Payable 10.0 6.50 6.5 65.0%
Notes Payable 5.0 3.25 5.0 100.0%
a Pro rata amount = $13/$20 = 0.65.
b Includes priority distribution and $1.75 transfer from subordinated debentures.
Remaining
Claim
Initial
Distributiona
From sale of fixed assets
Total receipts
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?
$14,000,000
2,500,000
$16,500,000
From sale of current assets
