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%. What will the equityholders receive if they had 5 million shares with a par value of $0.50 each?

Question

Quizplus · Accepted Answer

The total value of the firm is $2,100,000. After paying the secured creditors $1,300,000, $800,000 remains. The unsecured creditors are owed $1,200,000 ($2,500,000 total debt - $1,300,000 secured debt). Since the remaining $800,000 is less than the amount owed to unsecured creditors, equity holders receive $0.

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