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28 June, 15:45

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 trustee's costs total $281,250, and the firm has no accrued taxes on 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 from the sale of the assets?

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  1. 28 June, 18:09
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    The investors will receive $343,750

    Explanation:

    In order to calculate the amount each class of investors receive we would have to calulate first the Balance available for Investors as follows:

    Balance available for Investors=Total funds received - Trustee's cost

    Balance available for Investors=$2,500,000 - $281,250

    Balance available for Investors = $2,218,750

    Therefore, Balance available for stock holder=Balance available for Investors-Payment to Accounts payable-Notes Payable-Subordinated debentures

    Balance available for stock holder=$2,218,750 - $375,000 - $750,000 - $750,000

    Balance available for stock holder = $343,750

    The investors will receive $343,750
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