Skip to content

ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

Halden Co would raise $4.0m in a liquidation, of which $3.0m would go to secured creditors and $1.0m would be left for unsecured creditors, who are owed $5.0m. Under a reconstruction, unsecured creditors would exchange their $5.0m of debt for new equity that management values at $1.8m in total. Ignoring costs and the time value of money, which statement is correct for the unsecured creditors?

Unsecured creditors would receive $1.0m in liquidation, being $4.0m less $3.0m for secured creditors. The reconstruction gives them equity worth $1.8m, so they are better off by $0.8m. The gain must be measured against the liquidation outcome, not against the full $1.8m.

  1. AThey are worse off by $0.2m under reconstruction
  2. BThey are better off by $0.8m under reconstructionCorrect
  3. CThey are better off by $1.8m under reconstruction
  4. DThey are indifferent between the two options

Explanation

In liquidation unsecured creditors get $4.0m - $3.0m = $1.0m. Under the scheme they receive equity worth $1.8m. The gain is $1.8m - $1.0m = $0.8m. Choosing $1.8m ignores the liquidation alternative. Choosing -$0.2m uses the wrong comparison of $1.8m against $2.0m.

Did you get it right without looking?

One question tells you little. A timed set on Business re-organisation shows your real accuracy, how long you take and where you lose marks.

Practise Business re-organisationFree diagnostic mock

More Business re-organisation questions