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Unformatted text preview: ar in two quarterly installments of 50 cents and 30 cents. The first installment is to be paid in
c. Each creditor will be paid the full amount of its claims in three installments
of 50 cents, 25 cents, and 25 cents on the dollar. The installments will be
made in 60-day intervals, beginning in 60 days.
d. A group of creditors with claims of $50,000 will be immediately paid in full;
the rest will be paid 85 cents on the dollar, payable in 90 days. CHAPTER 17 CHAPTER 17 CASE Mergers, LBOs, Divestitures, and Business Failure 751 Deciding Whether to Acquire or Liquidate
Procras Corporation S haron Scotia, CFO of Rome Industries, must decide what to do about Procras
Corporation, a major customer that is bankrupt. Rome Industries is a large
plastic-injection-molding firm that produces plastic products to customer order.
Procras Corporation is a major customer of Rome Industries that designs and
markets a variety of plastic toys. As a result of mismanagement and inventory
problems, Procras has become bankrupt. Among its unsecured debts are total
past-due accounts of $1.9 million owed to Rome Industries.
Recognizing that it probably cannot recover the full $1.9 million that
Procras Corporation owes it, the management of Rome Industries has isolated
two mutually exclusive alternative actions: (1) acquire Procras through an
exchange of stock or (2) let Procras be liquidated and recover Rome Industries’
proportionate claim against any funds available for unsecured creditors. Rome’s
management feels that acquisition of Procras would have appeal in that it would
allow Rome to integrate vertically and expand its business from strictly industrial manufacturing to include product development and marketing. Of course,
the firm wants to select the alternative that will create the most value for its
shareholders. Charged with making a recommendation as to whether Rome
should acquire Procras Corporation or allow it to be liquidated, Ms. Scotia gathered the following data.
Acquire Procras Corporation Negotiations with Procras management have resulted in a planned ratio of exchange of 0.6 share of Rome Industries for each
share of Procras Corporation common stock. The following table reflects current
data for Rome Industries and Rome’s expectations of the data values for Procras
Corporation with proper management in place. Item Rome
Corporation Earnings available for common stock $640,000 $180,000 400,000 60,000 $32 $30 Number of shares of common stock outstanding
Market price per share Rome Industries estimates that after the proposed acquisition of Procras Corporation, its price/earnings (P/E) ratio will be 18.5. WW
W Liquidation of Procras Corporation Procras Corporation was denied its petition for reorganization, and the court-appointed trustee was expected to charge
$150,000 for his services in liquidating the firm. In addition, $100,000 in
unpaid bills were expected to be incurred between the time of filing the bankruptcy petition and the entry of an Order for Relief. The firm’s preliquidation
balance sheet is shown below. Use the liquidation example on the text’s Web
site at www.aw.com/gitman as a guide in analyzing this alternative. 752 PART 6 Special Topics in Managerial Finance Procras Corporation
Assets Liabilities and Stockholders’ Equity Cash $ Marketable securities 20,000
1,000 Accounts payable
Notes payable—bank Accounts receivable 1,800,000 Accrued wagesa Inventories 3,000,000 Unsecure...
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