Celin Company has just approached the bank for which you work as a loan officer to...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Celin Company has just approached the bank for which you work as a loan officer to seek additional financing. Celin has not been profitable recently, but it expects its current cost-cutting program to return the company to prof- itability. The company's collections of accounts receivable have been slow, and the company is afraid it may run out of cash while it is working on improving its working capi- tal management. The company wants to borrow $200,000 for equipment repairs and to improve liquidity. It is willing to give the bank a secondary claim on its receivables and inventory as collat- eral for the loan, but the holder of the secured note payable has first claim on the receivables and inventory and must be paid before any amounts from these assets could go to the bank. You would like to help Celin because the bank already. holds $100,000 of the company's senior unsecured notes. The senior unsecured notes must be paid in full before any amounts are paid to holders of the subordinated debentures and other unsecured creditors. After reviewing the balance sheet, you have some con- cerns about the company's assets. First, you know the goodwill would be worthless if the company were liqui- dated, and probably is worthless even if the company con- tinues operating. The secret product formulas do not seem to have helped business much, so their value is question- able. The land has been appraised at $40,000, and the buildings and equipment have been appraised at $400,000 if sold. Another bank holds the first mortgage note on the building and land, giving it first claim. The other assets seem fairly valued. P6-42Creditors' Claims Celin Company's balance sheet af December 31, 2001, appeared as follows: Cash Accounts receivable (net of $11,000 bad debt allowance) Inventory Prepaid insurance Buildings and equipment (net) Land Secret product formulas Goodwill Total Accounts payable Taxes payable First mortgage note Secured note payable Senior unsecured notes Subordinated debentures Capital stock Additional paid-in capital Retained earnings Total $ 12,000 120,000 180,000 30,000 480,000 25,000 200,000 300,000 $1,347,000 $ 55,000 10,000 300,000 200,000 230,000 200,000 75,000 150,000 127,000 $1,347,000 a. If you do not approve Celin's loan and the company is liq- uidated, which creditors will be paid, and how much? Pre- pare a listing. How much, if anything, will the bank lose? Which creditors do you think would be most against liqui- dating the company? Why? What would the stockholders get if the company were liquidated? b. Are there any assets that are troublesome to you when try- ing to value them? Explain why. What assumptions did you make about the value of the different assets when esti- mating how much each creditor would get? c. Suppose you approve the $200,000 loan to Celin. If the company uses $150,000 to repair equipment, increasing the equipment's liquidation value by $30,000, and holds the other $50,000 in marketable securities, how much can the bank expect to lose if Celin is liquidated? Show how assets would be apportioned to different claimants. d. Based on the information given, would you approve the loan knowing that Celin probably would liquidate without it and had a reasonable chance of survival with it? Explain your decision. Celin Company has just approached the bank for which you work as a loan officer to seek additional financing. Celin has not been profitable recently, but it expects its current cost-cutting program to return the company to prof- itability. The company's collections of accounts receivable have been slow, and the company is afraid it may run out of cash while it is working on improving its working capi- tal management. The company wants to borrow $200,000 for equipment repairs and to improve liquidity. It is willing to give the bank a secondary claim on its receivables and inventory as collat- eral for the loan, but the holder of the secured note payable has first claim on the receivables and inventory and must be paid before any amounts from these assets could go to the bank. You would like to help Celin because the bank already. holds $100,000 of the company's senior unsecured notes. The senior unsecured notes must be paid in full before any amounts are paid to holders of the subordinated debentures and other unsecured creditors. After reviewing the balance sheet, you have some con- cerns about the company's assets. First, you know the goodwill would be worthless if the company were liqui- dated, and probably is worthless even if the company con- tinues operating. The secret product formulas do not seem to have helped business much, so their value is question- able. The land has been appraised at $40,000, and the buildings and equipment have been appraised at $400,000 if sold. Another bank holds the first mortgage note on the building and land, giving it first claim. The other assets seem fairly valued. P6-42Creditors' Claims Celin Company's balance sheet af December 31, 2001, appeared as follows: Cash Accounts receivable (net of $11,000 bad debt allowance) Inventory Prepaid insurance Buildings and equipment (net) Land Secret product formulas Goodwill Total Accounts payable Taxes payable First mortgage note Secured note payable Senior unsecured notes Subordinated debentures Capital stock Additional paid-in capital Retained earnings Total $ 12,000 120,000 180,000 30,000 480,000 25,000 200,000 300,000 $1,347,000 $ 55,000 10,000 300,000 200,000 230,000 200,000 75,000 150,000 127,000 $1,347,000 a. If you do not approve Celin's loan and the company is liq- uidated, which creditors will be paid, and how much? Pre- pare a listing. How much, if anything, will the bank lose? Which creditors do you think would be most against liqui- dating the company? Why? What would the stockholders get if the company were liquidated? b. Are there any assets that are troublesome to you when try- ing to value them? Explain why. What assumptions did you make about the value of the different assets when esti- mating how much each creditor would get? c. Suppose you approve the $200,000 loan to Celin. If the company uses $150,000 to repair equipment, increasing the equipment's liquidation value by $30,000, and holds the other $50,000 in marketable securities, how much can the bank expect to lose if Celin is liquidated? Show how assets would be apportioned to different claimants. d. Based on the information given, would you approve the loan knowing that Celin probably would liquidate without it and had a reasonable chance of survival with it? Explain your decision.
Expert Answer:
Answer rating: 100% (QA)
a The secured note payable holder will be paid first followed by the first mortgage note holder The senior unsecured notes must be paid in full before any amounts are paid to holders of the subordinat... View the full answer
Related Book For
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Posted Date:
Students also viewed these accounting questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Transform the following product by making the change of variable i = k + 1. k So when k and K +2 When k = 1, then i = n k II k +2 k = 1 = n+ 1 II i = 2 are expressed in terms of i, the results are k...
-
Assume a Gold Starr Sports outlet store began August 2014 with 44 pairs of running shoes that cost the store $32 each. The sale price of these shoes was $67. During August, the store completed these...
-
Co B is the issuer of a tranche of mandatorily redeemable convertible preference shares (MRCPS) that was issued on the following terms: Required 1. Identify the elements included in the MRCPS. 2....
-
This question is based on the EViews file HEDGE.WF1 which contains daily data on the percentage returns of seven hedge fund indexes, from the 1st of April 2003 to the 28th of May 2010, a sample size...
-
Natural Company produces organic twig brooms. Each broom calls for 1 pound of wood; the wood should cost $0.25 per pound. In July, the division manufactured and sold 500,000 brooms. During the month,...
-
evaluated the operating performance of Dunn Company's six divisions. Veronica made the following presentation to Dunn's board of directors and suggested the Percy Division be eliminated. "If the...
-
John and Nina Hartwick, married 17 years, have a 13-year-old daughter. Eight years ago, they purchased a home on which they owe about $240,000. They also owe $6,000 on a two-year-old automobile. All...
-
Use in calculating NPV for a cash inflow project: The management of Fine Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment...
-
Simplify 6x2-24 *-2
-
Simplify 2x3-12x+16x x+3x-28 4x-36x+56 2x2-98
-
solve x4-15x210x + 24
-
Multiply. (3c-4)(5c+7) Simplify your answer.
-
Job 306 Job 307 Job 308 Balances on March 31 Direct materials used (in March) Direct labor used (in March) Overhead applied (March) Costs during April Direct materials used Direct labor used Overhead...
-
oblem 1 [5 marks] All vowels (filename: AllVowels.java) Design an algorithm and then write a program that randomly generates 4 vowels (a, e, i, o, u) all in lowercases. If any time the generated...
-
In a large midwestern university, 30% of the students live in apartments. If 200 students are randomly selected, find the probability that the number of them living in apartments will be between 55...
-
While snoozing at the controls of his Pepper Six airplane, Dunse P. Sluggard leaned heavily against the door; suddenly, the door flew open and a startled Dunse tumbled out. As he parachuted to the...
-
WoodGrain Technology makes home office furniture from fi ne hardwoods. The company uses a joborder costing system and predetermined overhead rates to apply manufacturing overhead cost to jobs. The...
-
Mary Adams is employed by Acme Company. Last week she worked 34 hours assembling one of the companys products and was idle 6 hours due to material short-ages. Acmes employees are engaged at their...
-
Use the Chart screen (Chart ) to generate historical prices of a selected stock and its call and put options with different expirations and expiration. Select a period in which the options were...
-
Use the Chart screen (Chart ) to generate historical prices for the S\&P 500 spot, and call and put options on the index with different expirations and expiration. Select a period in which the...
-
Suppose just prior to going ex-dividend, XYZ stock is trading at \(\$ 65\) and is expected to go ex-dividend with a dividend expected to be worth \(\$2.50\) on the ex-dividend date. What advice would...
Study smarter with the SolutionInn App