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Unformatted text preview: rs and unsatisfied portions of secured creditors’ claims (item 8) are all treated equally.
10. Preferred stockholders, who receive an amount up to the par, or stated, value of their preferred stock.
11. Common stockholders, who receive any remaining funds, which are distributed on an
equal per-share basis. If different classes of common stock are outstanding, priorities
may exist. WW
W other unsecured creditors will divide up, on a pro rata basis, any funds remaining
after all prior claims have been satisfied. If the proceeds from the sale of secured
assets are in excess of the claims against them, the excess funds become available
to meet claims of unsecured creditors.
The complete order of priority of claims is given in Table 17.9. In spite of the
priorities listed in items 1 through 7, secured creditors have first claim on proceeds from the sale of their collateral. The claims of unsecured creditors, including the unpaid claims of secured creditors, are satisfied next, and then, finally, the
claims of preferred and common stockholders. An example of the application of
these priorities is included on the text’s Web site at www.aw.com/gitman. Final Accounting
After the trustee has liquidated all the bankrupt firm’s assets and distributed the
proceeds to satisfy all provable claims in the appropriate order of priority, he or
she makes a final accounting to the bankruptcy court and creditors. Once the
court approves the final accounting, the liquidation is complete. 742 PART 6 Special Topics in Managerial Finance Review Questions
17–14 What is the concern of Chapter 11 of the Bankruptcy Reform Act of
1978? How is the debtor in possession (DIP) involved in (1) the valuation of the firm, (2) the recapitalization of the firm, and (3) the exchange
of obligations using the priority rule?
17–15 What is the concern of Chapter 7 of the Bankruptcy Reform Act of
1978? Under which conditions is a firm liquidated in bankruptcy?
Describe the procedures (including the role of the trustee) involved in liquidating the bankrupt firm.
17–16 Indicate in which order the following claims would be settled when distributing the proceeds from liquidating a bankrupt firm: (a) claims of
preferred stockholders; (b) claims of secured creditors; (c) expenses of
administering the bankruptcy; (d) claims of common stockholders;
(e) claims of unsecured, or general, creditors; (f) taxes legally due;
(g) unsecured deposits of customers; (h) certain eligible wages; (i) unpaid
employee benefit plan contributions; (j) unpaid interim expenses
incurred between the time of filing and the entry of an Order for Relief;
and (k) claims of farmers or fishermen in a grain-storage or fish-storage
facility. S U M M A RY
FOCUS ON VALUE
The financial manager is sometimes involved in corporate restructuring activities, which
involve the expansion and contraction of the firm’s operations or changes in its asset or
financial (ownership) structure. Included among corporate restructuring activities are
mergers, consolidations, and ho...
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