Pioneer Enterprises is bankrupt and being liquidated. The note payable was called after the company missed a
Question:
Pioneer Enterprises is bankrupt and being liquidated. The note payable was called after the company missed a large balloon payment. The lending institution petitioned for bankruptcy.
The liabilities and equity portion of Pioneer’s balance sheet are given below.
Current Liabilities | |
Accounts Payable | $6,600,000 |
Accrued Wages | 300,000 |
Payroll Remittances Payable | 100,000 |
Notes Payable | 19,250,000 |
Total Current Liabilities | $26,250,000 |
Long-term Liabilities | |
Bonds | $14,000,000 |
Subordinate Debentures | 8,500,000 |
Total Long-term Liabilities | $22,500,000 |
Shareholders’ Equity | |
Preferred Shares | $2,250,000 |
Common Shares | 9,000,000 |
Total Equity | $11,250,000 |
Total Liabilities and Equity | $60,000,000 |
The book value of the assets was $60 million, but the realized value when liquidated was only $39.96 million, of which $7.99 million was from the sale of the firm’s office building.
No single wage claim exceeds $2,000. The bonds are secured by the office building. The debentures are subordinate to the notes payable. Inventory of $1,000,000 has been purchased in the last 30 days and the suppliers intend to reclaim it – the inventory had been partially processed. The Receiver General is owed $100,000 in unpaid EI, CPP and income tax remittances.
Administration expenses associated with the liquidation were $4.9 million. The typical debt ratio in this industry is 35 percent.
REQUIRED: Complete the Excel Worksheet. Note that I have left some hints in the form of notes in the spreadsheet, so make sure you check them out.
- Determine the distribution of the proceeds in liquidation.
- How would the answer to Part 1 change if the notes payable were only $7,000,000?
- How would the answer to Part 1 change if the funds available to the unsecured creditors were $45,000,000?
- Suggest a proposal for reorganization for this company.
Note that you must modify the included spreadsheet so that if any numbers in Column B change, the rest of the spreadsheet will automatically recalculate and provide the correct numbers given this change.
Introduction to Corporate Finance What Companies Do
ISBN: 978-1111222284
3rd edition
Authors: John Graham, Scott Smart