5. 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? O Common stockholders Unfunded pension plan liabilities O Unsecured claims for customer deposits O Preferred stockholders Blue Pencil Publishing has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Blue Pencil Publishing to liquidate its assets and settle creditor claims. The court appointed the trustee with an estimated expense budget of $281,250. Subordinated debentures are subordinated only to the notes payable. Blue Pencil Publishing has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Blue Pencil Publishing to liquidate its assets and settle creditor claims. The court appointed the trustee with an estimated expense budget of $281,250. Subordinated debentures are subordinated only to the notes payable. Blue Pencil Publishing Balance Sheet (Thousands of dollars) $375 Current assets Net fixed assets 750 750 $1,875 Accounts payable 1,875 Notes payable Subordinated debentures Total debt Common equity $3,750 Total liabilities and equity 1,875 1,875 Total assets $3,750 The trustee has arranged the sale of Blue Pencil Publishing's assets and estimates to receive $2.50 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Blue Pencil Publishing'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 Blue Pencil Publishing is liquidated? $625,000 O $378,125 $718,750 $343,750 The trustee has arranged the sale of Blue Pencil Publishing's assets and estimates to receive $2.50 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Blue Pencil Publishing'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 Blue Pencil Publishing is liquidated? $625,000 $378,125 O $718,750 $343,750 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 Blue Pencil Publishing were a public utility company or a railroad service company instead of an industrial corporation, the bankruptcy courts would likely push for: Liquidation Reorganization 5. 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? O Common stockholders Unfunded pension plan liabilities O Unsecured claims for customer deposits O Preferred stockholders Blue Pencil Publishing has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Blue Pencil Publishing to liquidate its assets and settle creditor claims. The court appointed the trustee with an estimated expense budget of $281,250. Subordinated debentures are subordinated only to the notes payable. Blue Pencil Publishing has been in financial distress for the past three years. The company's reorganization plans were rejected, and the bankruptcy court is forcing Blue Pencil Publishing to liquidate its assets and settle creditor claims. The court appointed the trustee with an estimated expense budget of $281,250. Subordinated debentures are subordinated only to the notes payable. Blue Pencil Publishing Balance Sheet (Thousands of dollars) $375 Current assets Net fixed assets 750 750 $1,875 Accounts payable 1,875 Notes payable Subordinated debentures Total debt Common equity $3,750 Total liabilities and equity 1,875 1,875 Total assets $3,750 The trustee has arranged the sale of Blue Pencil Publishing's assets and estimates to receive $2.50 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Blue Pencil Publishing'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 Blue Pencil Publishing is liquidated? $625,000 O $378,125 $718,750 $343,750 The trustee has arranged the sale of Blue Pencil Publishing's assets and estimates to receive $2.50 million in proceeds from the liquidation. Proceeds from the liquidation will be used to settle Blue Pencil Publishing'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 Blue Pencil Publishing is liquidated? $625,000 $378,125 O $718,750 $343,750 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 Blue Pencil Publishing were a public utility company or a railroad service company instead of an industrial corporation, the bankruptcy courts would likely push for: Liquidation Reorganization