D a group of creditors with claims of 50000 will be

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ar in two quarterly installments of 50 cents and 30 cents. The first installment is to be paid in 90 days. 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 Industries Procras 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 Balance Sheet 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...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online