Sharon Scotia, CFO of Rome Industries, must decide what to do about Procras Corporation, a major customer that is bankrupt. Rome Industries is a large plastic-injection-molding firm that produces plastic products to customer order. Procras Corporation is a major customer of Rome Industries that designs and markets a variety of plastic toys. As a result of mismanagement and inventory problems, Procras has become bankrupt. Among its unsecured debts are total past-due accounts of $1.9 million owed to Rome Industries.

Recognizing that it probably cannot recover the full $1.9 million that Procras Corporation owes it, the management of Rome Industries has isolated two mutually exclusive alternative actions: (1) acquire Procras through an exchange of stock or (2) let Procras be liquidated and recover Rome Industries proportionate claim against any funds available for unsecured creditors. Romes management feels that acquisition of Procras would have appeal in that it would allow Rome to integrate vertically and expand its business from strictly industrial manufacturing to include product development and marketing. Of course, the firm wants to select the alternative that will create the most value for its shareholders. Charged with making a recommendation as to whether Rome should acquire Procras Corporation or allow it to be liquidated, Ms. Scotia gathered the following data.

Acquire Procras Corporation Negotiations with Procras management have resulted in a planned ratio of exchange of 0.6 share of Rome Industries for each share of Procras Corporation common stock. The following table reflects current data for Rome Industries and Romes expectations of the data values for Procras Corporation with proper management in place.

	Rome	Procras
Item	Industries	Corporation
Earnings available for common stock	$640,000	$180,000
Number of shares of common stock outstanding	400,000	60,000
Market price per share	$32	$30

Rome Industries estimates that after the proposed acquisition of Procras Corporation, its price/earnings (P/E) ratio will be 18.5.

Liquidation of Procras Corporation Procras Corporation was denied its petition for reorganization, and the court-appointed trustee was expected to charge $150,000 for his services in liquidating the firm. In addition, $100,000 in unpaid bills were expected to be incurred between the time of filing the bankruptcy petition and formal action by the court. The firms pre liquidation balance sheet is shown below.

rocras Corporation Balance Sheet
Assets		Liabilities and Stockholders Equity
Cash	$ 20,000	Accounts payable	$2,700,000
Marketable securities	1,000	Notes payablebank	1,300,000
Accounts receivable	1,800,000	Accrued wagesa	120,000
Inventories	3,000,000	Unsecured customer depositsb	60,000
Prepaid expenses	14,000	Taxes payable	70,000
Total current assets	$4,835,000	Total current liabilities	$4,250,000
Land	$ 415,000	First mortgagec	$ 300,000
Net plant	200,000	Second mortgagec	200,000
Net equipment	350,000	Unsecured bonds	400,000
Total fixed assets	$ 965,000	Total long-term debt	$ 900,000
Total	$5,800,000	Common stock (60,000 shares)	$ 120,000
		Paid-in capital in excess of par	480,000
		Retained earnings	50,000
		Total stockholders equity	$ 650,000
		Total	$5,800,000

Represents wages of $600 per employee earned within 90 days of filing bankruptcy for 200 of the firms employees.

Unsecured customer deposits not exceeding $2,100 each.

The first and second mortgages are on the firms total fixed assets.

The trustee expects to liquidate the assets for $3.2 million$2.5 million from current assets and $700,000 from fixed assets.

a. Calculate (1) the ratio of exchange in market price and (2) the earnings per share (EPS) and price/earnings (P/E) ratio for each company on the basis

b. Find the postmerger earnings per share (EPS) for Rome Industries, assuming that it acquires Procras Corporation under the terms given.

c. Use the estimated postmerger price/earnings (P/E) ratio and your finding in part b to find the postmerger share price.

d. Use your finding in part c to determine how much, if any, the total market value of Rome Industries will change as a result of acquiring Procras Corporation.

e. Determine how much each claimant will receive if Procras Corporation is liquidated under the terms given.

f. How much, if any, of its $1.9 million balance due from Procras Corporation will Rome Industries recover as a result of liquidation of Procras?

g. Compare your findings in parts d and f, and make a recommendation for Rome Industries with regard to its best actionacquisition of Procras or the liquidation of Procras.

h. Which alternative would the shareholders of Procras Corporation prefer? Why?