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Foundations Of Financial Management
Found in: Page 538
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

$1,400,000

$1,200,000

Inventory

$1,800,000

$900,000

Machinery and equipment

$1,100,000

$600,000

Building and plant

$4,200,000

$2,500,000

Total assets

$8,500,000

$5,200,000

Liabilities and stockholder’s claims

Liabilities

Accounts payable

$2,800,000

First lien, secured by machinery and equipment

$900,000

Senior unsecured debt

$2,200,000

Subordinated debenture

$1,700,000

Total liabilities

$7,600,000

Stockholder’s claims

Preferred stock

$250,000

Common stock

$650,000

Total stockholder’s claims

$900,000

Total liabilities and stockholder’s claims

$8,500,000

f. Compute a ratio of your answers in part d and e. This will indicate the initial allocation ratio.

The allocation ratio is 60%.

See the step by step solution

Step by Step Solution

Step 1: Information provided in question

Total liquidation value of assets left after deducting administrative costs, unpaid taxes, and satisfying first lien = $4,200,000

Total liquidation value of liabilities after partial cover of first lien = $7,000,000

Step 2: Calculation of ratio of asset value and liability value left

The allocation ratio is 60%.

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