The management of Patricia's Paddle Boats has proposed to reorganize the firm. The proposal is based on a going-concern value of $2,100,000. The proposed financial structure is $1,000,000 in new mortgage debt,$100,000 in subordinated debt and $1,000,000 in new equity. All creditors,both secured and unsecured,are owed $2,500,000. Secured creditors have a mortgage lien for $1,300,000 on the factory. The corporate tax rate is 34%. How much should the unsecured creditors receive?

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The unsecured creditors should receive $600,000. This is calculated as follows:Total debt = $1,000,000 + $100,000 = $1,100,000Secured debt = $1,300,000Unsecured debt = $1,100,000 - $1,300,000 = $2,500,000 - $1,300,000 = $600,000

The Management of Patricia's Paddle Boats Has Proposed to Reorganize