7. (15 marks) The following are all questions relating to DV Company whose financial data is shown below. Please treat all questions as if they were independent occurrences. Balance Sheet (in 000's) for DV Company before the transactions indicated in the question: Liabilities and Equit $ 000 Assets Cash S '000 10Accounts payable (a) 250 10 10 270 90 90 450 Current portion of mortgage payable 100 200 Current portion of long term debt (c) 3 10- Total of current liabilities Accounts Receivable Total of current assets Long term mortgage payable (b) Machinery Office building Total of fixed assets Total assets 25 Long term loan (c) 125 Total liabilities 150 Capital stock 460 Retained earnings Total Equity Total Liabilities and Equity 10 460 Notes: Details of accounts: (a) including $100,000 of employment insurance, CPP, HST ("deemed trusts" (b) secured by office building (c) secured by Accounts receivable and Inventory Details of NRV if insolvency occurs: 60% of Accounts receivable are collectable 90% of the inventory is worthless The machinery will disappear entirely The building is appraised at $300,000 [Assume the following payment priority sequence: (i) deemed trusts, (ii) secured creditors upto the value of their specific collaterali) unsecured creditors (including the under-secured portion of secured debt, and (iv) current shareholders] Required Consider the following independent scenarios. a) The Board of Directors of DV Company declared and paid a $10,000 dividend to the shareholders using the last of the cash in the company bank account. Dv Company declared bankruptcy immediately on the next day. Do you think the transaction is legitimate? On what legal grounds could it be challenged by the bankruptcy trustee? b) CEO of DV company has a rich uncle who sees potential in the office building. The CEO of DV company, in a desperate bid to raise cash and stave off insolvency, sells the office building to the uncle for $250,000, and then leases it back. What contractual mechanisms could the mortgage loan documentation have in place to prevent such a transaction from occurring? c) Continuing with the scenario in b), assume that the mortgage lender was paid back in full and this did not contractually prevent the transaction from occurring. DV company now gets hit with an notice from the CRA claiming tax avoidance by DV in the past and requiring it to pay $400,000 immediately. DV decides to declare bankruptcy. On what legal grounds could the transaction with the uncle in b) be challenged by the bankruptcy trustee? d) Now assume that DV, in an effort to avoid insolvency, enters into an out-of-court restructuring agreement with both its secured creditors. Under the terms of the proposed agreement, DV offers to swap each dollar of their outstanding secured debt with a dollar of equity each. i. Calculate the levcrage ratio (ratio of total liabilitics to total assets) before and after the proposed restructuring. Does the restructuring help improve the solvency of the company? ii. Given the case facts, do you think that the mortgage lender l be sufficiently incentivized to participate in the proposed debt-equity exchange? Explain briefly ii. Given the case facts, do you think that the other long term secured lender will be sufficiently incentivized to participate in the proposed debt-equity exchange? Explain briefly e Now assume that DV is contemplating a legal restructuring. DV's restructuring advisor (the CRO) just back from a training stint in the U.S. and finds out that the NRV of the secured building is vastly overstated. Hence, the CRO suggests a quick sale of the building upon filing insolvency and lines up an unrelated financial company, Fairmax Corp., as a "stalking horse" bidder. Fairmax offers an initial bid of $75,000. The mortgage lender is outraged by this lowball bid and thinks that the NRV of the building is likely to be at least double that bid. Assuming that there are no other bids over Fairmax's initial bid, how could the mortgage lender maximize its realization? Which Canadian legal framework would likely be appealing for restructuring DV's debt? Explain briefly f) 7. (15 marks) The following are all questions relating to DV Company whose financial data is shown below. Please treat all questions as if they were independent occurrences. Balance Sheet (in 000's) for DV Company before the transactions indicated in the question: Liabilities and Equit $ 000 Assets Cash S '000 10Accounts payable (a) 250 10 10 270 90 90 450 Current portion of mortgage payable 100 200 Current portion of long term debt (c) 3 10- Total of current liabilities Accounts Receivable Total of current assets Long term mortgage payable (b) Machinery Office building Total of fixed assets Total assets 25 Long term loan (c) 125 Total liabilities 150 Capital stock 460 Retained earnings Total Equity Total Liabilities and Equity 10 460 Notes: Details of accounts: (a) including $100,000 of employment insurance, CPP, HST ("deemed trusts" (b) secured by office building (c) secured by Accounts receivable and Inventory Details of NRV if insolvency occurs: 60% of Accounts receivable are collectable 90% of the inventory is worthless The machinery will disappear entirely The building is appraised at $300,000 [Assume the following payment priority sequence: (i) deemed trusts, (ii) secured creditors upto the value of their specific collaterali) unsecured creditors (including the under-secured portion of secured debt, and (iv) current shareholders] Required Consider the following independent scenarios. a) The Board of Directors of DV Company declared and paid a $10,000 dividend to the shareholders using the last of the cash in the company bank account. Dv Company declared bankruptcy immediately on the next day. Do you think the transaction is legitimate? On what legal grounds could it be challenged by the bankruptcy trustee? b) CEO of DV company has a rich uncle who sees potential in the office building. The CEO of DV company, in a desperate bid to raise cash and stave off insolvency, sells the office building to the uncle for $250,000, and then leases it back. What contractual mechanisms could the mortgage loan documentation have in place to prevent such a transaction from occurring? c) Continuing with the scenario in b), assume that the mortgage lender was paid back in full and this did not contractually prevent the transaction from occurring. DV company now gets hit with an notice from the CRA claiming tax avoidance by DV in the past and requiring it to pay $400,000 immediately. DV decides to declare bankruptcy. On what legal grounds could the transaction with the uncle in b) be challenged by the bankruptcy trustee? d) Now assume that DV, in an effort to avoid insolvency, enters into an out-of-court restructuring agreement with both its secured creditors. Under the terms of the proposed agreement, DV offers to swap each dollar of their outstanding secured debt with a dollar of equity each. i. Calculate the levcrage ratio (ratio of total liabilitics to total assets) before and after the proposed restructuring. Does the restructuring help improve the solvency of the company? ii. Given the case facts, do you think that the mortgage lender l be sufficiently incentivized to participate in the proposed debt-equity exchange? Explain briefly ii. Given the case facts, do you think that the other long term secured lender will be sufficiently incentivized to participate in the proposed debt-equity exchange? Explain briefly e Now assume that DV is contemplating a legal restructuring. DV's restructuring advisor (the CRO) just back from a training stint in the U.S. and finds out that the NRV of the secured building is vastly overstated. Hence, the CRO suggests a quick sale of the building upon filing insolvency and lines up an unrelated financial company, Fairmax Corp., as a "stalking horse" bidder. Fairmax offers an initial bid of $75,000. The mortgage lender is outraged by this lowball bid and thinks that the NRV of the building is likely to be at least double that bid. Assuming that there are no other bids over Fairmax's initial bid, how could the mortgage lender maximize its realization? Which Canadian legal framework would likely be appealing for restructuring DV's debt? Explain briefly f)