Question: Disaster Airlines is a firm in severe
Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on time and it is far behind on payments to its banks and long-term debt holders. The firm has decided to ether be purchased by another air carrier or liquidate its assets and close. The managers have approached Altruistic Airlines about being acquired. After examining Disaster’s financial statements, looking at the routes owned by Disaster, and looking at the condition of the fixed assets, Altruistic Airlines has offered to pay the stockholders of Disaster Airlines $8 million to be acquired. Disaster Airlines covers flights to both areas in which Altruistic already flies, but also has routes in areas into which Altruistic is interested in expanding. As part of the analysis, Altruistic determined that the additional cash flows resulting from the acquisition would total $500,000 this year and would grow at a rate of four percent for the next three years. After this time the cash flows would grow at a rate of two percent annually. The WACC of Altruistic Airlines would be eight percent after the merger. If, instead, Disaster Airlines decides to liquidate its assets, it will pay off its debt and give any remaining funds to the firm’s stockholders. Disaster Airlines’ balance sheet is listed below. 
The accrued wages were earned within the last 90 days prior to filing for bankruptcy. The unpaid employee benefits were due in the six months prior to the filing for bankruptcy. The unsecured customer deposits are for less than $900 each. Disaster Airlines has no property taxes past due. The first mortgage is secured against the fixed assets of the firm. The debentures are subordinate to the notes payable to banks. The liquidation of the firm’s current assets produced $186 million and of the firm’s fixed assets produced $800 million for a total of only $986 million in funds to distribute to the creditors and stockholders of the firm. The administrative expenses associated with the bankruptcy totaled $1 million and unpaid expenses incurred after the filing of the bankruptcy petition but before the trustee was appointed totaled $5 million. Show which method of dissolution, an acquisition by Altruistic Airlines or a liquidation of assets, is more beneficial for the creditors and stockholders of Disaster Airlines and the stockholders of Altruistic Airlines.
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Disaster Airlines, Inc. Balance Sheet as of June 25, 2018 (in millions of dollars) Liabilities and Equity Assets Current assets: Current liabilities: $ 4 Accrued wages (2,500 employees) Unpaid employee benefits Unsecured customer deposits Cash and marketable securities $ 63 3 Accounts receivable 28 6 Inventory Total 100 $ 191 Accrued taxes 22 Accounts payable Notes payable to banks Total 157 211 $ 403 Fixed assets: Gross plant and equipment Less: Depreciation Net plant and equipment $1,152 Long-tem Debt: First mortgage Subordinate debentures $ 160 412 $ 572 248 $ 904 Total Stockholders' equity: Common stock and $ 100 paid-in surplus (100 million shares) Retained eamings Total Total liabilities and equity 20 S 120 $1.095 Total assets $1.095
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