Southern Goods has an estimated going-concern value of $2 million.As a result of negotiations the firm's bankruptcy reorganization plan consists of $600,000 in new mortgage debt,$250,000 in subordinated debt,and $1,150,000 in new equity.Currently the firm has a mortgage of $823,000,other secured debt of $89,000,and unsecured debt of $1.34 million.According to the APR,what will the stockholders receive if they currently have 2 million shares with a par value of $1 each?

Question

Quizplus · Accepted Answer

Under the Absolute Priority Rule (APR), stockholders are the last to receive any distribution in a bankruptcy reorganization. The firm's reorganization plan includes paying off debts with new mortgage debt, subordinated debt, and new equity. Since the total reorganization value is allocated to new debts and new equity, and given the existing debts exceed the going-concern value, stockholders would receive nothing ($0) because creditors are prioritized over equity holders in bankruptcy proceedings.

Southern Goods Has an Estimated Going-Concern Value of $2 Million