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Financial management question: Southwestern Wear Inc.

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Southwestern Wear Inc. has the following balance sheet:
Current assets $1,875,000 Accounts payable $375,000
Fixed Assets 1,875,000 Notes Payable 750,000
Subordinated debentures 750,000
Total debt 1,875,000
Common Equity 1,875,000
Total Assets 3,750,000 Total liabilities and equity $3,750,000

The trustees cost total $281,250 and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable.

If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received form sale of the assets?

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The expert examines financial management for Southwestern Wear Inc.

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ANSWERS

Cash to be distributed = $2.5 million - 281,250 = 2,218,750

Distribution:
1. Accounts payable creditor = 375,000
2. Notes payable creditor = 750,000
3. Subordinated debentures creditor = 750,000
4. Common equity holders = 2,218,750 - 375,000 - 750,000 - 750,000 = 343,750

Below is how assets of a liquidated entity should be distributed based on the Chapter 7 of the Bankruptcy Act:
1. Secured creditors, who are entitled to the proceeds of the sale of specific property pledged for a lien or a mortgage. If the ...

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