ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Brandt Co is in distress. Its going-concern value is $50m, while liquidation would realise $38m after costs. Secured creditors are owed $30m, unsecured creditors $40m and shareholders hold equity. Under a proposed reconstruction, unsecured creditors would exchange their $40m claims for 60% of the new equity, and the remaining shareholders keep 40%. Assuming the going-concern value is $50m after reconstruction and secured debt remains at $30m, what is the value of the unsecured creditors' stake and does it beat their liquidation recovery?
Post-reconstruction equity is $50m less $30m secured debt, or $20m. Unsecured creditors hold 60%, worth $12m. In liquidation only $38m minus $30m, or $8m, would be left for them. So the reconstruction gives them more than liquidation, and they should accept.
- A$12m, which exceeds their liquidation recovery of $8mCorrect
- B$12m, which is below their liquidation recovery of $8m
- C$20m, which exceeds their liquidation recovery of $8m
- D$12m, which equals their liquidation recovery of $12m
Explanation
Equity value after reconstruction = 50 - 30 = $20m. Unsecured creditors get 60% = $12m. In liquidation: 38 - 30 = $8m is available to unsecured creditors. So $12m beats $8m. Taking 60% of $50m ($30m) would ignore secured debt, and the $20m option is the whole equity.
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