Chapter 15
FINANCIALLY TROUBLED VENTURES:
TURNAROUND OPPORTUNITIES?
FOCUS
We direct attention in this chapter toward recognizing and managing financial distress.
An inability to pay creditor obligations as they come due typically poses a major financial
threat and certainly distracts the venture from its primary mission. A successful
entrepreneur copes with such financial distress and finds a way to turn the situation
around. The alternative to a successful turnaround is venture liquidation.
LEARNING OBJECTIVES
1. Explain financial distress faced by troubled ventures
2. Define and describe insolvency
3. Describe how troubled ventures emerge from financial distress
4. Describe how private reorganizations and liquidations take place
5. Describe reorganization under Chapter 11 of the U.S. bankruptcy laws
6. Describe liquidation under Chapter 7 of the U.S. bankruptcy laws
CHAPTER OUTLINE
15.1 VENTURE OPERATING AND FINANCING OVERVIEW
15.2 THE TROUBLED VENTURE AND FINANCIAL DISTRESS
A. Balance Sheet Insolvency
B. Cash Flow Insolvency
C. Temporary Versus Permanent Cash Flow Problems
15.3 RESOLVING FINANCIAL DISTRESS SITUATIONS
A. Operations Restructuring
B. Asset Restructuring
C. Financial Restructuring
15.4 PRIVATE WORKOUTS AND LIQUIDATIONS
A. Private Workouts
B. Private Liquidations
15.5 FEDERAL BANKRUPTCY LAW
A. Bankruptcy Reorganizations
B. Reasons for Legal Reorganizations
C. Legal Reorganization Process
D. Bankruptcy Liquidations
SUMMARY
244
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 245
DISCUSSION QUESTIONS AND ANSWERS
1. What are the three types or methods of restructuring available when trying to
turn around financially troubled ventures?
The three basic types/methods are: (a) operations restructuring, (b) asset restructuring,
and (c) financial restructuring
2. Identify major factors that cause ventures to get into financial trouble.
Ventures get into trouble by mishandling strategic issues, failing to unite management
on key initiatives, and having poor finance and accounting practices and controls.
Since we are primarily examining entrepreneurial finance, we concentrate on the
finance and accounting origins of vent5ure troubles, including overextension of
credit, excessive use of financial leverage (borrowed funds), and lack of adequate
cash planning and financial forecasting.
Factors that cause ventures to get into financial trouble are very similar to those that
bring about venture failure. The U.S. Business Administration found that two-thirds
of business failures are due to either economic factors (inadequate sales, insufficient
profits, etc.) or financial factors (excessive debt, insufficient financial capital, etc.).
3. What is meant by financial distress?
Financial distress refers to when cash flow is insufficient to meet current debt
obligations.
4. What is meant by loan default? Also, describe (a) an acceleration provision and
(b) a cross-default provision.
A loan default is when there is a failure to meet interest or principal payments when
due on the loan. (a) An acceleration provision makes all future obligations of the loan
due immediately upon default, and (b) a cross-default provision provides that if one
loan defaults, it places all loans of the firm in default. (A “technical default” typically
refers to the violation of a loan covenant other than a failure to make a payment that
is due.)
5. What do we mean when we say a venture is insolvent?
An insolvent venture is one where equity is negative and/or the cash flow of the firm
is unable to meet debt obligations.
6. Compare and contrast (a) balance sheet insolvency and (b) cash flow insolvency.
Balance sheet insolvency is when the firm has negative equity (or the debt is greater
than the assets) and is usually attributable to multiple years of operating losses. Cash
246 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
flow insolvency is when a venture’s cash flow is insufficient to meet its current
contractual debt obligations.
7. Use the concept of cash flow insolvency over time and describe what would
happen if the problem is temporary rather than permanent.
Continued cash flow insolvency over time relates to a sustained inability for cash
flow to meet debt obligations. A temporary insolvency is transient in the sense that
nearby future cash flows, sufficient to meet debt obligations, are expected (and
arrive). See Figure 15.1 for a graphical depiction of the two.
8. What are some of the basic requirements of a successful turnaround plan?
A successful turnaround plan should provide immediate remedial actions (once
serious financial problems are recognized) and detail the financial ramifications
expected given the remedial actions.
Often the immediate goal of a turnaround plan is raising survival cash quickly and
beginning to restore creditor confidence. Components of the plan may involve
employee unpaid leaves or layoffs, the sale of receivables at deep discounts, and the
liquidation of finished goods inventories. The turnaround plan needs to explain
credibly how both short-term survival and long-term financial health will result for
such actions.
9. Define operations restructuring and describe how it can be implemented to
escape financial distress.
Operations restructuring is either growing the firm’s revenues relative to cost or
cutting the firms costs relative to revenue. See Figure 15.2 for this and other ways to
address financial distress.
10. Define asset restructuring and describe how it can be implemented to escape
from financial distress.
Asset restructuring involves either selling off assets and/or improving the firm’s
working capital. See Figure 15.2 for this and other ways to address financial distress.
11. Define financial restructuring and describe what is meant by debt payments
extension and debt composition change.
Financial restructuring involves changing the contractual terms or composition of the
firm’s debt obligations to help the firm meet those obligations. Debt payment
extension is allowing the firm to pay their interest or principal payments at a later
date. Debt composition change is when the creditor reduces its claim (typically
interest or principal) against the firm.
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 247
See Figure 15.2 for the use of financial restructuring and other ways to address
financial distress.
12. What is a private workout? Also, describe some of the characteristics of ventures
that are likely to engage in private workouts.
A private workout is a voluntary restructuring of the firm in lieu of declaring
bankruptcy. Ventures engaging in private workouts typically have few creditors
and/or are early stage ventures. They also rarely have public bonds outstanding.
13. What is a private liquidation? What does the process of assignment mean?
A private liquidation is selling the pieces of a venture. The process of assignment is
the distribution of assets to a third party to liquidate them and distribute the proceeds
to the creditors.
14. What is Chapter 11 bankruptcy and how is it used by ventures?
Chapter 11 bankruptcy is an attempt by the firm to receive protection from creditors
as it tries to reorganize itself.
15. Describe a venture bankruptcy. Also, indicate the difference between (a) a
voluntary bankruptcy petition and (b) an involuntary bankruptcy petition.
A venture is bankrupt when a petition for bankruptcy is filed with a federal court.
Voluntary bankruptcy is a petition filed by the venture’s management. An
involuntary bankruptcy is one where the petition is filed by the venture’s creditors.
16. Briefly describe the common pool and holdout problems that often make it
necessary for a venture to enter into a court-supervised reorganization.
A common pool problem exists because individual creditors have an incentive to
foreclose on the venture even though it is worth more as a going concern. The
holdout problem exists when one or more of the creditors refuse to agree to the
reorganization terms because of the potential for a larger individual recovery.
17. Briefly define the following terms: cram down procedure, debtor-in-possession
financing, and prepackaged bankruptcy.
A cram down procedure is when a bankruptcy court accepts a reorganization plan for
all creditors including dissenting creditor classes. Debtor-in-possession financing is
short-term financing to help meet liquidity needs during the reorganization process.
A prepackaged bankruptcy is an initial private attempt to convince a majority of the
creditors to go along with a reorganization plan that will be proposed after the venture
files under Chapter 11.
248 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
18. Describe the absolute priority rule.
The absolute priority rule is a hierarchal chain of priority when a firm files for
bankruptcy starting with senior creditors ending with common stock holders.
19. What is the purpose of Chapter 7 of the U.S. Bankruptcy Code? What are some
of the characteristics of ventures that use Chapter 7 instead of private liquidation?
The purpose of Chapter 7 is quickly to shut down the operations of a venture and start
to liquidate the firm. Firms that use Chapter 7 are firms that do not see feasible
operations in the future for their company, and using Chapter 7 allows the owners to
remove themselves from the bankruptcy process.
20. From the Headlines – Necton: Describe the business model turnaround Necton
undertook. Comment on what you think would have been the challenges and your
perceptions about the likelihood the new business model will succeed.
Answers will vary: While the market for Necton’s products appears promising, the
number of producers distributing their gourmet salts worldwide is increasing rapidly.
Then number of consumers willing to pay $20 a pound for salt products may also be
limited. Nonetheless, the business model may succeed. At the time we went to press,
Necton products were listed on Amazon, along with many other gourmet salt
products.
INERNET ACTIVITIES
1. Go to the Web site for Wall Street Journal or some other financial publication such
as Inc. magazine and identify a venture that has recently filed for reorganization or
liquidation with the U.S. bankruptcy courts. Then, access the Securities and
Exchange Commission’s Web site at
[Link] and find recent financial
statements for the venture you identified as being in financial distress. By way of a
hint, you will probably want to access the most recent Form 10Q which provides
quarterly information. Determine whether the venture was suffering from balance
sheet insolvency, cash flow insolvency, or both. Explain the bases for your
insolvency assessments.
Web-research results will vary due to constant updated of the related web sites.
EXERCISES/PROBLEMS AND ANSWERS
1. [Balance Sheet Restructuring Concepts] It was shown earlier in the chapter that
Northland Industries was suffering from balance sheet insolvency. Two scenarios
are possible for Northland in year 3. In scenario 1, year 3 for Northland is expected
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 249
to result in an additional $150,000 operating loss. On the other hand, scenario 2 is
expected to be a “breakout” year for Northland where higher sales and lower costs
due 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. On the other hand,
operating profits will be used to reduce total debt.
A. Show Northland’s basic balance sheets under both scenarios.
YEAR 3
Year 0 Year 1 Year 2 Scenario 1 Scenario 2
Current Assets 100,000 100,000 100,000 100,000 100,000
Fixed Assets 100,000 100,000 100,000 100,000 100,000
Total Assets 200,000 200,000 200,000 200,000 200,000
Total Debt $0 $100,000 $250,000 $400,000 $0
Equity:
Common Stock 200,000 200,000 200,000 200,000 200,000
Retained Earnings 0 -100,000 -250,000 -400,000 0
Total Equity 200,000 100,000 -50,000 -200,000 200,000
Total Debt & Equity $200,000 $200,000 $200,000 $200,000 $200,000
B. Based on your analysis, will Northland Industries still be balance sheet
insolvent in year 3 under scenario 1? If this trend continues, would you describe
Northland’s financial distress as a temporary or permanent problem?
Northland is balance sheet insolvent in Scenario 1. If this continues, it would be a
permanent problem.
C. Based on your analysis, will Northland Industries still be balance sheet
insolvent in year 3 under scenario 2? If this trend continues, would you describe
Northland’s financial distress as a temporary or permanent problem?
Northland is projected to be balance sheet solvent (positive equity) in Scenario 2.
If this projection is accurate, the insolvency is only a temporary problem.
2. [Cash Flow Restructuring Concepts] It was shown earlier in the chapter that
Westland Industries was suffering from cash flow insolvency in terms of its earnings
before interest, taxes, and depreciation (EBITDA). Two scenarios are possible for
Westland in year 3. Scenario 1 suggests that the results from operations for year 2
are expected to be repeated in year 3 and thereafter. In scenario 2, Westland is
expected to have a breakout year in terms of sales of $400,000 and operating
expenses prior to depreciation being 60 percent of sales. Interest is expected to
remain at $40,000 because of the need to finance the venture’s growth. Prepare the
basic income statements (from sales to EBIT) under both scenarios. Comment on
your findings.
250 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
YEAR 3
Year 0 Year 1 Year 2 Scenario 1 Scenario 2
Sales 50,000 100,000 100,000 100,000 400,000
-Operating Expenses -50,000 -75,000 -75,000 -75,000 -240,000
EBITDA 0 25,000 25,000 25,000 260,000
-Interest 0 -20,000 -40,000 -40,000 -40,000
EBIT 0 5,000 -15,000 -15,000 220,000
If scenario 1 occurs, the cash flow insolvency will continue. Under scenario 2, the
venture moves into substantial cash flow solvency position.
3. [Cash Flow Restructuring Concepts] It was shown earlier in the chapter that
Eastland Industries was suffering from cash flow insolvency. Let’s assume that
scenario 1 projects that year 3 and following years will be like the results incurred
for year 2 where profitability is low and continued large investments in net working
capital is required. In contrast, an optimistic scenario for Eastland Industries for
year 3 suggests that a sales breakout year will lead to operating efficiencies will lead
to net income projections of $100,000. Improved management of working capital
also will result in a net working capital increase of only $30,000. Estimate the net
cash build or burn after a $50,000 debt repayment under both scenarios. Comment
on your findings.
YEAR 3
Year 0 Year 1 Year 2 Scenario 1 Scenario 2
Net Income 0 -70,000 20,000 20,000 100,000
+Depreciation 0 20,000 20,000 20,000 20,000
-Increase in NWC -100,000 -50,000 -70,000 -70,000 -30,000
-Increase in GFA -100,000 0 0 0 0
+Equity/Debt Issues 200,000 100,000 0 0 0
-Debt Repayment 0 0 -50,000 -50,000 -50,000
Net Cash Build/Burn 0 0 -80,000 -80,000 40,000
If scenario 1 occurs, the cash flow insolvency will continue. Under scenario 2, the
venture moves into substantial cash flow solvency position.
4. [Turnaround Opportunity: Restructuring Issues] Following are the financial
statements for the Chenhai Manufacturing Corporation for 2009 and 2010. The
venture is in financial distress and hopes to turn around its financial performance in
the near future.
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 251
CHENHAI MANUFACTURING CORPORATION
2009 2010
Cash $ 50,000 $ 10,000
Accounts receivables 200,000 250,000
Inventories 450,000 490,000
Total current assets 700,000 750,000
Fixed assets, net 400,000 400,000
Total assets $1,100,000 $1,150,000
Accounts payable $ 130,000 $170,000
Accruals 50,000 70,000
Bank loan 90,000 90,000
Total current liabilities 270,000 330,000
Long-term debt 300,000 400,000
Common stock ($10 par) 300,000 300,000
Capital surplus 50,000 50,000
Retained earnings 180,000 70,000
Total liabilities and equity $1,100,000 $1,150,000
2009 2010
Net sales $1,400,000 $1,000,000
Cost of goods sold -780,000 -700,000
Gross profit 620,000 300,000
Marketing -130,000 -150,000
General and administrative -150,000 -150,000
Depreciation -40,000 -53,000
EBIT 300,000 -53,000
Interest -45,000 -57,000
Earnings before taxes 255,000 -110,000
Income taxes (40%) 102,000 0*
Net income $ 153,000 $ -110,000
*Note a tax credit would be generated and could be used if the firm returns to
profitability in the future.
A. Calculate the sale-to-cash conversion period for Chenhai in both 2009 and 2010.
Refer to Chapter 5 for calculating the cash conversion cycle and its three
components. Note: use “yearend” balance sheet data instead of averages so that
2009 and 2010 can be compared. Note: the sale-to-cash conversion period also is
referred to as the days sales outstanding (DSO) or the average collection period.
2009 sale-to-cash conversion period = $200,000/($1,400,000/365)
= $200,000/$3,835.62 = 52.14 days
2010 sale-to-cash conversion period = $250,000/($1,000,000/365)
= $250,000/$2,739.73 = 91.25 days
B. Calculate the inventory-to-sale conversion period for Chenhai in both 2009 and
2010.
252 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
Note: the inventory-to-sale conversion period also is referred to as the inventory
conversion period (ICP).
2009 inventory-to-sale conversion period = $450,000/($780,000/365)
= $450,000/$2,136.99 = 210.58 days
2010 inventory-to-sale conversion period = $490,000/($700,000/365)
= $490,000/$1,917.81 = 255.50 days
C. Calculate the purchase-to-payment conversion period for Chenhai in both 2009
and 2010. Also determine the length of the cash conversion cycle for both 2009
and 2010.
The purchase-to-payment conversion period is the third component in the cash
conversion cycle.
2009 purchase-to-payment conversion period = ($130,000 +
$50,000)/($780,000/365) = $180,000/$2,136.99 = 84.23 days
2010 purchase-to-payment conversion period = ($170,000 +
$70,000)/($700,000/365) = $240,000/$1,917.81 = 125.14 days
2009 cash conversion cycle (CCC) = 210.58 days + 52.14 days – 84.23 days
= 178.49 days
2010 cash conversion cycle (CCC) = 255.50 days + 91.25 days – 125.14 days
= 221.61 days
D. What type of working capital restructuring might Chenhai undertake to turn
around its financial performance? What other type of asset restructuring might
Chenhai consider undertaking?
The CCC has increased from 178.49 days to 221.61 days. An effort should be
made to reduce the inventory-to-sale conversion period as well as the sale-to-cash
conversion period. At the same time, Chenhai must be careful not to alienate
suppliers and those who provide accruals since the purchase-to-payment
conversion period also was increased sharply between 2009 and 2010.
Chenhai might also considering selling any non-core fixed assets.
E. What type(s) of operations restructuring might Chenhai attempt during 2011?
Cost of goods sold increased from 55.7% ($780,000/$1,400,000) in 2009 to
70.0% in 2010 ($700,000/$1,000,000). Better control of the cost of production is
needed. Marketing expenses increased (from $130,000 to $150,000) as sales
decreased between 2009 and 2010. An improved link between marketing
expenses and sales needs to be developed. General and administrative expenses
remained fixed at $150,000 even though sales declined. Sales levels need to be
improved relative to G&A or G&A expenses must be reduced.
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 253
F. What type(s) of financial restructuring might Chenhai attempt during 2011?
Chenhai might attempt to reduce the amount of long-term debt that is outstanding
through debt-forgiveness. The firm might also attempt to get maturity extensions
on its long-term debt and/or negotiate a lower interest rate on the debt. Similar
negotiations with the provider of the bank loan could be attempted.
G. What prevailing conditions (economic, competitive, etc.) might cause you to
believe that Chenhai’s situation may be a turnaround opportunity versus a
permanent problem?
Of major concern is the decline in sales from $1,400,000 to $1,000,000. If the
decline is due to a general decline in economic activity (and industry competitors
have suffered similarly), the financial distress may only be temporary. However,
if the sales decline is due to loss of market share to competitors, Chenhai may find
itself unable to overcome such a competitive disadvantage and the financial
distress might become permanent.
5. [Financial Restructuring Issues] EnCal is a small California based power company
specializing in power generation methods that use clean burning fuels and renewable
natural resources. However, due to California's complex and confusing power
pricing structure, EnCal is reeling from the aftereffects of the state's attempt at power
deregulation. EnCal has been unable to pass its operating costs on to its consumers.
To make matters worse, EnCal has recently completed construction on several power
production centers in efforts to double its capacity and to help diminish the frequency
of power outages that are wreaking havoc on local commerce. As a result, they have
accumulated a massive debt load to help finance these facilities and are on the verge
of default. However, raising the prices of the power it supplies to its consumers
involves a slow and laborious bureaucratic process and regulatory approval. EnCal
is forced to reorganize its financing. EnCal's partial income statements and balance
sheets for the 2006 and 2007 fiscal years follow. An incomplete income statement for
2008 is also provided.
A financial restructuring that would reduce EnCal's debt burden has been
proposed. The proposal is to reduce the interest rate on its bank loan to 6% and loan
principal to $100 million, to reduce the interest rate on its mortgage loans to 8%,
and to replace all of its subordinated loan balance with a 50% equity stake in the
company.
254 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
Income Statement ($ Millions) 2006 2007 2008
Revenue $240 $360 ?
COGS (70% - 2006, 80% - 2007/2008) -168 -288 ?
Gross Profit 72 72 ?
SG&A -30 -35 -35
EBITDA 42 37 ?
Depreciation -20 -30 -40
EBIT 22 7 ?
Interest -22 -92 ?
Earnings Before Taxes 0 -85 ?
Taxes (40%) 0 0 ?
Net Income $0 -$85 ?
Balance Sheet ($ Millions)
Assets
Cash $10 $10
Accounts Receivable 20 30
Inventories 10 15
Fixed Assets, Net 510 1,080
Total Assets $550 $1,135
Liabilities and Equity
Accounts Payable $14 $24
Notes Payable (8% Bank Loan) 50 140
Accrued Liabilities (Wages & Taxes) 4 4
Long-Term Mortgage Loans (10%) 180 460
Long-Term Subordinated Loans (12%) 0 290
Common Stock 300 300
Retained Earnings 2 -83
Total Liabilities & Equity $550 $1,135
A. Assuming a 25% increase in revenue with no additional
capital investment, what will EnCal's new income statement and balance sheet look
like in the business as usual and financial restructuring scenarios?
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 255
2008 2008 Re-
Income Statement ($ Millions) 2006 2007 BAU structure
Revenue $240 $360 $450 $450
COGS (70% - 2006, 80% - 2007/2008) -168 -288 -360 -360
Gross Profit 72 72 90 90
SG&A -30 -35 -35 -35
EBITDA 42 37 55 55
Depreciation -20 -30 -40 -40
EBIT 22 7 15 15
Interest -22 -92 -92 -43
Earnings Before Extraordinary Item 0 -85 -77 -28
Debt Foregiveness in Restructure 40
Earnings Before Interest and Taxes 0 -85 -77 12
Taxes (40%) 0 0 0 0
Net Income $0 -$85 -$77 $12
Balance Sheet ($ Millions)
Assets
Cash $10 $10 -$32 $17
Accounts Receivable 20 30 38 38
Inventories 10 15 19 19
Fixed Assets, Net 510 1,080 1,040 1,040
Total Assets $550 $1,135 $1,064 $1,113
Liabilities
Accounts Payable $14 $24 $30 $30
Notes Payable (8% Bank Loan) 50 140 140 100
Accrued Liabilities (Wages & Taxes) 4 4 4 4
Long-Term Mortgage Loans (10%) 180 460 460 460
Long-Term Subordinated Loans (12%) 0 290 290 0
Additional Loans (12%) 0 0 0 0
Common Stock 300 300 300 590
Retained Earnings 2 -83 -160 -71
Total Liabilities & Equity $550 $1,135 $1,064 $1,113
B. Will EnCal be able to service its debt under either scenario?
Under the restructured 2008 projection they can service the debt. Under the
original BAU plan, they would not have been able to service the debt.
C. Would EnCal be a likely candidate for Chapter 7 bankruptcy?
EnCal would probably avoid liquidation under Chapter 7 if these projections are
credible and accepted by the bankruptcy trustee.
D. Suppose the governor has called an emergency legislative
session on the utility's behalf to prevent its eventual bankruptcy. If the governor
is able to get a bill passed supporting a rate hike on electrical power, how much
must the EnCal charge per kilowatt if it is going to be able to cover its interest
256 Chapter 15: Financially Troubled Ventures: Turnaround Opportunities?
payments under the new financial restructuring plan. Assume EnCal's power
generation facilities have a maximum capacity of 800 megawatts with an average
capacity utilization of 50%.
($450M)/[(800,000kW)*(50%)*(365days)*(24hrs/day)] = $.128 per kWh
MINI CASE: ENDCO, INC.
Endco is a wireless solutions provider that facilitates wireless Internet access through
small remote devices that connect to portable computers. During the past several years,
Endco was lavished with an abundance of equity financial capital from a variety of
venture investors. Although initial adoption rates for this new service were far below
expectations, most were confident that expanding the service area and thus increasing the
service's availability to new and existing users would result in rapid increases in the
volume of new subscribers. Helping to fund this massive expansion, Endco arranged
tremendous amounts of debt financing, much of which was secured by the expansion
assets themselves (i.e. wireless towers and transmission facilities). However, recently it
became clear that Endco would not be profitable and would only continue to burn large
amounts of cash if it continued to operate. Using the financial data provided, answer the
following questions regarding Endco's Chapter 7 bankruptcy liquidation.
Administrative and legal fees are $370,000, and the bank underwriting the notes
payable have the "right of offset" on cash deposits, the amount indicated in the cash
account on the balance sheet.
Balance Sheet ($ Millions)
Liquidation
Assets Receipts
Cash $2.4 $2.4
Inventory 16.0 5.0
Accounts Receivable 5.6 3.0
Net Plant 200.0 165.0
Net Equipment 100.0 57.0
Total Assets $324.0 $232.4
Liabilities & Equity
Accounts Payable $3.5
Notes Payable (12% Bank Loan) 29.0
Accrued Liabilities (Wages & Taxes) 1.5
Long-Term Mortgage Loans (12%, 10 years) 140.0
Long-Term Subordinated Loans (14%, 15 years) 80.0
Debentures (Subordinated to Notes Payable) 20.0
Preferred Stock 300.0
Common Stock 100.0
Retained Earnings -350.0
Total Liabilities $324.0
A. Who are considered to be the priority claimants in this liquidation?
Chapter 15: Financially Troubled Ventures: Turnaround Opportunities? 257
The priority claimants are the government, employees and mortgage holders.
B. Who are considered to be general creditors?
The general creditors are the other remaining claimants, with the exception of the
preferred and common stock holders, who are considered claimants of last resort.
C. Create a table indicating the cash distribution to each creditor and the percentage of
the original liability that is satisfied.
Priority Remaining Payments on % Liability
Claimant Payments Claims Remaining Claims Total Satisfied
Administrative and Legal 0.37 0.37
Wages & Taxes 1.50 1.50 100.00%
Long-Term Mortgage Loan 140.00 140.00 100.00%
Long-Term Subordinated Loan 0.00 80.00 64.04 64.04 80.05%
Accounts Payable $3.5 2.80 2.80 80.05%
Notes Payable 2.40 26.60 21.29 23.69 81.70%
Debentures 20.00 0.00 0.00 0.00%
Totals $144.27 $130.10 $88.13
Excluding Debentures $110.10
Remaining balance $88.13
Pay rate to general creditors 80.05%