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

The first step is to determine the value available to distribute to the creditors, which is the going-concern value of $2.3 million minus the proposed financial structure of $2.3 million ($500,000 + $300,000 + $1,500,000) which results in $0 available for distribution to the creditors.

Since the total amount owed to the creditors is $3 million, and there is no value available to distribute, the secured creditors will receive the entire $2 million from the mortgage lien on the book bindery. Therefore, the answer is B) $2,000,000.

The Management of Schroeder Books Has Proposed to Reorganize the Company