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?