Question

Bankruptcy problem

                 Assets                                                                Liabilities and Equity

Cash                                              $40,000          Accounts payable                       $200,000

Accounts receivable                    200,000         Accrued wages                                 50,000     

                                                                                Secured bank loan                        150,000

                                                                                Unsecured bank loan                   250,000

Inventory                                      400,000         Mortgage                                        300,000

Plant and equipment                  360,000         Subordinated debentures              60,000

                                                                          Junior subordinated debentures        40,000

                                                                                Common stock                                50,000

                                                                                Retained earnings                       (100,000)

The firm defaults and the only solution is a liquidate, so the question becomes how much each claimant receive.

A buyer is found for the receivable for $0.80 per $1.00.

The inventory, which secures the bank loan, can be sold for $0.60 on the $1.00.

The plant and equipment, which secures the mortgage, are sold for $200,000.

The payables are equally subordinated to both bank loans.

The subordinated debentures are subordinated to the mortgage.

The junior subordinated debentures are subordinated to the subordinated debentures.

Court costs, pension costs have previously been covered.

How much is available to pay general credits?

What are the amounts of each general creditors claims?

• Accounts receivable
• Accounts payable
• Accrued wages
• Secured bank loan
• Unsecured bank loan
• Mortgage
• Senior subordinated debentures
• Junior subordinated debentures
• Common stock

If the absolute order of claims is maintained, how much do the holders of each general creditors receive?

• Accounts receivable
• Accounts payable
• Accrued wages
• Secured bank loan
• Unsecured bank loan
• Mortgage
• Senior subordinated debentures
• Junior subordinated debentures
• Common stock

Would your previous answers be different if the senior subordinated debentures were not subordinated to the mortgage (i.e., not subordinated)?

Answer 1