ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction
In designing a financial reconstruction scheme, which approach is most likely to gain acceptance from every stakeholder group?
A scheme is most likely to succeed if every stakeholder group is expected to do at least as well as in liquidation, with the extra value from continuing the business shared between them. Any group left worse off than liquidation would reject it.
- AEnsuring each group is expected to be at least as well off as in liquidation, with the going-concern surplus sharedCorrect
- BGiving shareholders the entire going-concern surplus because they own the company
- CGiving the secured lender less than its liquidation recovery to fund new investment
- DExcluding unsecured creditors from the scheme to simplify negotiations
Explanation
Each group will compare the scheme with its liquidation alternative and will vote against anything worse. A scheme that leaves all at least as well off, and shares the surplus from continuing, is most likely to be accepted. The other options leave some group worse off or ignore its rights.
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.
More Financial reconstruction questions
- Under a reconstruction scheme, existing shareholders of Halden plc are asked to accept a rights issue to fund the scheme. Which statement be…
- Delta plc is in financial distress and proposes a reconstruction scheme in which unsecured creditors exchange part of their debt for equity.…
- Zeta plc is insolvent. Its secured creditors would be repaid in full from asset sales, but unsecured creditors would receive only 20 cents p…
- A company is insolvent and its directors are considering an administration rather than an immediate liquidation. Which statement best descri…
- Dalton Co owes unsecured creditors $12m. Liquidation would yield them 30 cents per dollar. A reconstruction would convert the debt into 6m n…
- Which of the following is the most direct financial indicator that a company may be heading for financial distress and may need reconstructi…