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ACCA Strategic Professional · Advanced Financial Management · Financial reconstruction

Under a reconstruction scheme, existing shareholders of Halden plc are asked to accept a rights issue to fund the scheme. Which statement best describes how the scheme should be evaluated from their viewpoint?

Shareholders should compare the value of their holding after the scheme, less any new cash they must subscribe, with what they would receive in liquidation, which is often nothing. They gain only if the net value exceeds that alternative.

  1. AThey should compare the value of their post-scheme holding, net of new funds they inject, with their value if the company is liquidatedCorrect
  2. BThey should accept whenever the company avoids liquidation, regardless of value
  3. CThey should compare the scheme only with the current share price before the distress was announced
  4. DThey should accept if creditors receive more than liquidation value

Explanation

Shareholders are residual claimants and usually receive nothing in liquidation. They should compare the post-scheme value of their holding less the cash they invest with their liquidation payout, which is often nil. Merely avoiding liquidation, using a pre-distress price, or looking at creditor outcomes does not measure their gain.

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