Skip to content

ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Calder plc has 10m of unsecured loan notes outstanding, with liquidation value to this class of 4.0m. A scheme offers loan note holders 8% of the 10m face value in cash (0.8m) plus 5m new shares each worth 0.80 after the scheme. A bank holds a separate secured loan of 6m that is fully covered by assets. Which statement is correct about the loan note holders' position?

Loan note holders receive 0.8m in cash plus shares worth 4.0m, a total of 4.8m. This is more than the 4.0m they would get in liquidation, so they should accept. The bank's fully covered secured loan does not affect their comparison.

  1. AThey receive 4.8m, which exceeds the 4.0m liquidation value, so they should acceptCorrect
  2. BThey receive 4.8m, which is less than liquidation value, so they should reject
  3. CThey receive 4.0m, equal to liquidation, so they are indifferent
  4. DThey receive 0.8m, so they should reject because cash is below 4.0m

Explanation

Cash 0.8m plus shares 5m × 0.80 = 4.0m gives 4.8m. This exceeds the 4.0m liquidation value, so acceptance is rational. The secured bank loan is irrelevant to the loan note holders' calculation. Counting only the cash gives the final distractor.

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