[Acer99]

First, Thank you for looking at this and attemping to help.



You are given the following balance sheet of XYZ Corporation:


Cash $ 168,000 Wages Payable $ 54,000

Accts. Rec. 12,000 Trade Credit 22,000

Inventory 5,000 Notes Payable 30,000

Fixed Assets 70,000 Bonds (@ $1000 par) 250,000

- acc. Depr. –52,000 Common Stock (par=$1) 40,000

TOTAL $ 203,000 Retained Earnings -193,000

TOT Liab. & Eq. $ 203,000


XYZ is obviously in serious trouble. The union representing the employees will not take “one dime less” than what the workers are owed. The bankers who hold the Notes are willing to take $.80 on the dollar to settle XYZ’s debt with them. All other creditors will settle for even less and anticipate settlement for $.60 on the dollar. Any continued operations are handled completely with cash such that liabilities do not increase. The bonds are 8% coupon (semiannual payments) maturing on September 1, 2018 and currently sell for an invoice price of only 67.450% of par. If purchased en masse via a tender offer, the bonds would probably average an invoice price which translates into a yield to maturity of only 13%. Management figures they can hold on for about 6 more months before filing for bankruptcy. You can assume that the appropriate interest rate is 2% and that the yearly standard deviation of XYZ’s assets is .80.


If today’s date is December 4th, 2008, what is your best estimate of the market price per share of XYZ common stock?

[Acer99]

Formatting didn't come out right.

Assets:
Cash $ 168,000
Accts. Rec. 12,000
Inventory 5,000
Fixed Assets 70,000
- acc. Depr. – 52,000
TOTAL $ 203,000

Liabilities:
Wages Payable $ 54,000
Trade Credit 22,000
Notes Payable 30,000
Bonds (@ $1000 par) 250,000
Common Stock (par=$1) 40,000
Retained Earnings - 193,000
TOT Liab. & Eq. $ 203,000