Reorganization of Liquidation. The balance sheet of Morris Corporation for the year ended December 31, 20X3, follows:
Balance Sheet
|
Current assets |
$ 500,000 |
Current liabilities |
$ 550,000 |
|
Fixed assets |
520,000 |
Long term liabilities |
300,000 |
|
Common stock |
250,000 |
||
|
Retained earnings |
(80,000) |
||
|
Total liabilities and |
|||
|
Total assets |
$1,020,000 |
stockholders’ equity |
$1,020,000 |
The firm’s liquidation value is $700,000. Instead of liquidating, there could be a reorganization with an investment of an additional $400,000. The reorganization is anticipated to provide earnings of $150,000 a year. A multiplier of 8 is appropriate. If the $400,000 is obtained, long term debt holders will receive 35 percent of the common stock in the reorganized firm in substitution for their current claims. Is reorganization or liquidation recommended?