Question

A petition for the reorganization of the Boniface Company has been filed under the Insolvency Act. The trustees estimate the firm's liquidation value, after considering costs, is $130 million. Alternatively, the trustees, using the analysis of the Zulu Consulting firm, predict that the reorganized business will generate $19 million annual cash flows in perpetuity. The discount rate is 10%.

Calculate the present value if the company is alive. (Enter the answer in millions. Round the final answer to 2 decimal places. Omit $ sign in your response.)

PV      $_________

Should Boniface be liquidated or reorganized?

• Boniface should be liquidated______

• Boniface should be reorganized______

Answer 1

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Answer:

PV on liquidation= $130M

PV on reorganizing = $19M/0.1 = $190M

Since PV on reorganizing greater than liquidation we must exercise reorganization