The management of Magic Mobile Homes has proposed to reorganize the firm.The proposal is based on a going-concern value of €2 million.The proposed financial structure is €750,000 in new mortgage debt,€250,000 in subordinated debt and €1,000,000 in new equity.All creditors,both secured and unsecured,are owed €2.5 million euros.Secured creditors have a mortgage lien for €1,500,000 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

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The total value of the firm is €2 million. After paying the secured creditors €1.5 million, €500,000 remains. The new financial structure proposes €750,000 in new mortgage debt and €250,000 in subordinated debt, totaling €1 million, which exceeds the remaining €500,000. Therefore, equity holders receive €0.

The Management of Magic Mobile Homes Has Proposed to Reorganize