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Nancy Corporation is suffering from financial distress as it can be seen from its balance sheet:

Two scenarios are possible for Nancy in Year 3: In scenario 1, Year 3 for Nancy is expected to result in an additional $150,000 operating loss. In scenario 2, Year 3 is expected to be a breakout year for Nancy when higher sales and lower costs owing to economies of scale are forecasted to produce operating profits of $250,000 in Year 3. Total assets are expected to remain at $200,000 under either scenario. Total debt will be increased to finance additional operating losses. Operating profits will be used to reduce total debt.

1. Show Nancys balance sheets under both scenarios. b.Based on your analysis, will Nancy Corporation still be balance sheet insolvent in Year 3 under scenario 1? If this trend continues, would you describe Nancys financial distress as a temporary or a permanent problem? c. Based on your analysis, will Nancy Corporation still be balance sheet insolvent in Year 3 under scenario 2? If this trend continues, would you describe Nancys financial distress as a temporary or a permanent problem? d. There are two basic options in the situation of financial distress: liquidation or reorganization. Explain them. (5 points

YEAR 2 YEAR O $100,000 100,000 $200,000 $ 0 YEAR 1 $100,000 100,000 $200,000 $100,000 $100,000 100,000 $200,000 $250,000 Current assets Fixed assets Total assets Total debt Equity Common stock Retained earnings Total equity Total debt and equity 200,000 0 200,000 $200,000 200,000 -100,000 100.000 $200,000 200,000 -250,000 -50,000 $200,000

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