Question: The date is December 31, 2021. Fortran Corp. cannot repay its $300 million in loans, and STD intends to file for bankruptcy in the US.

The date is December 31, 2021. Fortran Corp. cannot repay its $300 million in loans, and STD intends to file for bankruptcy in the US. Management has studied the alternatives of (a) Chapter 7; and (b) Chapter 11. Chapter 7: In a Chapter 7, management forecasts that the sale of all of Fortran assets will provide lenders with a present value of $188 million in cash at December 31, 2021. Chapter 11: In a Chapter 11, management will continue to operate the business. Management believes an appropriate WACC for the reorganized STD (after bankruptcy) is 9%. Management projects the following free cash flow for STD in US $ millions.

STD year end Dec 31	2022	2023	2024
Free Cash Flow	10	15	20
Sale of STD	--	--	200

What is the present value of the lenders recovery in Chapter11?

You work for the Bank of America, a Fortran lender.

a. In strict numerical terms, which bankruptcy option is better? Chapter 7 or Chapter 11?

b. You are an executive at Bank of America. Provide the most logical reason for why you would select Chapter 7 for the bank, even though the present value calculation might be different from Chapter 11.

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