As a consequence of the Covid-19 Easyjet Corporation is suffering from financial distress as it can be seen from its balance sheet:

Two scenarios are possible for Easyjet in Year 3: In scenario 1, Year 3 for Easyjet is expected to result in an additional $150,000 operating loss.

In scenario 2, Year 3 is expected to be a breakout year for Easyjet 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.

Instructions:

1. Show Easyjets balance sheets under both scenarios.

2. Based on your analysis, will Easyjets Corporation still be balance sheet insolvent in Year 3 under scenario 1? If this trend continues, would you describe Easyjets financial distress as a temporary or a permanent problem?

3. Based on your analysis, will Easyjet Corporation still be balance sheet insolvent in Year 3 under scenario 2? If this trend continues, would you describe Amadeuss financial distress as a temporary or a permanent problem?

4. There are two basic options in the situation of financial distress: liquidation or reorganization. Explain them.

YEAR O YEAR 1 YEAR 2 Current assets Fixed assets Total assets $100,000 100,000 $200,000 $100,000 100,000 $200,000 $100,000 100,000 $200,000 $ 0 $100,000 $250,000 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 YEAR O YEAR 1 YEAR 2 Current assets Fixed assets Total assets $100,000 100,000 $200,000 $100,000 100,000 $200,000 $100,000 100,000 $200,000 $ 0 $100,000 $250,000 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