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CMA Intermediate · Financial Management and Business Data Analytics · Capital Structure and Capital Stacking

A firm's capital stack has senior debt Rs 50 lakh, subordinated debt Rs 30 lakh and equity Rs 20 lakh. In liquidation, the assets realise Rs 70 lakh. Ignoring costs, how much do the subordinated debt holders receive?

Subordinated debt holders receive Rs 20 lakh. Senior debt ranks first and absorbs Rs 50 lakh of the Rs 70 lakh realised, leaving Rs 20 lakh for the subordinated layer, which is less than its claim, so equity receives nothing.

  1. ARs 20 lakhCorrect
  2. BRs 30 lakh
  3. CRs 42 lakh
  4. DRs 0

Explanation

Senior debt is paid first and takes Rs 50 lakh out of Rs 70 lakh. The remaining Rs 20 lakh goes to subordinated debt, which is short of its Rs 30 lakh claim. Equity gets nothing. Pro-rata sharing (Rs 42 lakh) ignores seniority.

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