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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Corvin Co is proposing a reconstruction. Unsecured creditors of $8m would receive 25 cents per dollar in liquidation (recovering $2.0m). Under the scheme they would exchange their claims for 10m new shares in Corvin. The reconstructed company is valued at $24m in total equity, and existing shareholders retain 14m shares (total 24m shares). What is the value of the creditors' package, and is it better than liquidation?

The creditors' package is worth $10.0m, which is better than the $2.0m liquidation recovery. Equity of $24m spread over 24m shares gives $1.00 per share, and creditors receive 10m shares, so their holding is worth $10.0m.

  1. A$10.0m; better than liquidationCorrect
  2. B$24.0m; better than liquidation
  3. C$4.0m; better than liquidation
  4. D$10.0m; worse than liquidation

Explanation

Value per share = 24m/24m shares = $1.00. Creditors hold 10m shares, so the package is worth $10.0m, against $2.0m in liquidation. It is better. $24m is the whole equity, not the creditors' part; $4.0m wrongly uses 10/24 of nothing meaningful.

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