Skip to content

ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Brindle plc is evaluating a scheme. Liquidation proceeds after costs are 9.0m. Debenture holders (secured, owed 5.0m) would be repaid in full from liquidation. Unsecured creditors are owed 10.0m. Under the scheme, debenture holders keep their debt, unsecured creditors accept 50% of their claim as new 8% loan stock of 5.0m (worth 4.0m) plus 25% of the enlarged equity, expected to be worth 3.0m. Which statement is correct?

Under liquidation unsecured creditors receive 4.0m, being 9.0m less the 5.0m secured debentures. Under the scheme they get loan stock worth 4.0m plus equity worth 3.0m, totalling 7.0m. They therefore gain 3.0m, so they should favour the scheme.

  1. AUnsecured creditors gain 3.0m compared with liquidationCorrect
  2. BUnsecured creditors gain 7.0m compared with liquidation
  3. CUnsecured creditors lose 1.0m compared with liquidation
  4. DUnsecured creditors are indifferent between the scheme and liquidation

Explanation

Liquidation: 9.0 - 5.0 = 4.0m to unsecured creditors. Scheme: loan stock 4.0m + equity 3.0m = 7.0m. Gain = 7.0 - 4.0 = 3.0m. The 7.0m option wrongly treats the full scheme value as the gain, ignoring the liquidation alternative.

Did you get it right without looking?

One question tells you little. A timed set on Financial reconstruction shows your real accuracy, how long you take and where you lose marks.

Practise Financial reconstructionFree diagnostic mock

More Financial reconstruction questions