ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Brelo Co proposes a scheme: unsecured creditors of $12m will exchange their claims for $6m of new 8% loan notes plus equity. On liquidation they would receive $0.45 per $1 owed. Brelo expects annual interest saving from the scheme and the new notes are valued at par. What minimum value of equity must creditors receive for the scheme to leave them no worse off than liquidation?
Creditors need no additional equity. Liquidation would give $5.4m, and the new loan notes valued at par are worth $6m, so they are already better off by $0.6m without any equity.
- A$0.6mCorrect
- B$5.4m
- C$6.0m
- D$0.0m
Explanation
Liquidation receipts are $12m x 0.45 = $5.4m. New loan notes at par are worth $6m, which already exceeds $5.4m. Therefore the minimum extra equity needed is nil, so the answer is $0.0m. Note $0.6m is the excess over liquidation, not a requirement.
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