The management of Schroeder Books has proposed to reorganize the company. The proposal is based on a going-concern value of $2.3 million. The proposed financial structure is $500,000 in new mortgage debt, $300,000 in subordinated debt and $1,500,000 in new equity. All creditors, both secured and unsecured, are owed $3 million dollars. Secured creditors have a mortgage lien for $2,000,000 on the book bindery. The corporate tax rate is 34%. How much should the secured creditors receive?

Question

Quizplus · Accepted Answer

Secured creditors have a priority claim on the assets to which they have a lien. In this case, they have a mortgage lien for $2,000,000 on the book bindery. Since the going-concern value of the company is $2.3 million, which is more than the amount owed to the secured creditors, they should receive the full amount of their claim, which is $2,000,000.

The Management of Schroeder Books Has Proposed to Reorganize the Company