ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
Dalton Co owes unsecured creditors $12m. Liquidation would yield them 30 cents per dollar. A reconstruction would convert the debt into 6m new shares, giving creditors 40% of the enlarged company's equity, and would require $3m of new cash from existing shareholders. Post-scheme equity is valued at $20m including the new cash. Which statement is correct?
The creditors' 40% stake in equity valued at $20m is worth $8.0m, compared with $3.6m from liquidation (30 percent of $12m). Creditors are therefore better off under the scheme and should prefer it, assuming the valuation is reliable.
- ACreditors' stake is worth $8.0m versus $3.6m in liquidation, so they should prefer the schemeCorrect
- BCreditors' stake is worth $6.0m versus $3.6m in liquidation, so they should prefer liquidation
- CCreditors' stake is worth $8.0m versus $12.0m in liquidation, so they should prefer liquidation
- DCreditors' stake is worth $3.6m versus $8.0m in liquidation, so they should prefer liquidation
Explanation
40% x $20m = $8.0m. Liquidation recovery = 30% x $12m = $3.6m. The scheme is better for creditors by $4.4m. Option B uses a wrong share-based value; C and D reverse or misstate the liquidation figure.
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