70.2K

Verified Solution

Link Copied!

8. Liquidations in bankruptcy When a business is worth more if its assets are sold than if it continues to operate, then the business is liquidated, and the proceeds from the sale are used to satisfy any outstanding debt. Liquidation occurs when businesses file for bankruptcy under Chapter 7 of the Federal Bankruptcy Reform Act. This act provides for an equitable distribution of the debtor's assets among the creditors. The distribution of assets is governed by a certain priority of claims. Which of the following claimants has the highest priority according to Chapter 7? Unsecured claims for customer deposits Common stockholders O Preferred stockholders O Unfunded pension plan liabilities Celestial Crane Cosmetics has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Celestial Crane Cosmetics to liquidate its assets and settle creditor claims. The court appointed the trustee with an estimated expense budget of $703,125. Subordinated debentures are subordinated only to the notes payable. Celestial Crane Cosmetics Balance Sheet (Thousands of dollars) Current assets $4,688 Accounts payable $938 Net fixed assets 4,688 Notes payable 1,875 Subordinated debentures 1,875 Total debt 4,688 Common equity 4,688 Total assets $9,376 Total liabilities and equity $9,376 The trustee has arranged the sale of Celestial Crane Cosmetics's assets and estimates to receive $6.25 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Celestial Crane Cosmetics's liabilities. Based on your understanding of distribution of assets to various claimants, how much will common stockholders receive (if they receive anything at all) when Celestial Crane Cosmetics is liquidated? O $1,562,000 O $944,763 O $858,875 $1,796,875 The bankruptcy courts and the company have discretion in how they elect to handle a failing firm. Just as the decision to reorganize or liquidate the firm depends on the relationship between its going concern and its liquidation values, the significance and competitiveness of the industry in which the failing firm operates also affects the court's decision. If Celestial Crane Cosmetics were a public utility company or a railroad service company instead of an industrial corporation, the bankruptcy courts would likely push for: O Liquidation O Reorganization

Answer & Explanation Solved by verified expert

See Answer