Current assets $ 400 Accounts payable 50 Net fixed assets 600 Accrued taxes 40 Accrued wages 30 Notes payable 180 Total current liabilities $ 300 First-mortgage bondsª Second-mortgage bonds 300 200 Debentures 200 Subordinated debentures 100 Common stock 50 Retained earnings _(150) Total assets $1,000 Total claims $1,000 Notes: *All fixed assets are pledged as collateral to the mortgage bonds. Subordinated to notes payable only.
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the balance sheet shown here (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 sale were $600,000. The trustee’s costs amounted to $50,000; no single worker was due more than the maximum allowable wages per worker; and there were no unfunded pension plan liabilities.
a. How much will McDaniel’s shareholders receive from the liquidation? (SHOW ALL WORK).
b. How much will the mortgage bondholders receive? (SHOW ALL WORK).
c. Who are the other priority claimants (in addition to the mortgage bondholders)? How much will they receive from the liquidation? (SHOW ALL WORK).
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? (SHOW ALL WORK).
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