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 dollars. Secured creditors have a mortgage lien for $1,500,000 on the factory. The corporate tax rate is 34%.
-Refer to the above scenario.How much should the secured creditors receive?

Question

Quizplus · Accepted Answer

The secured creditors have a mortgage lien for $1,500,000 on the factory, the total amount owed to all creditors is $2.5 million, and the proposed financial structure includes $750,000 in new mortgage debt. Therefore, the secured creditors should receive the full amount of their lien, $1,500,000, plus the new mortgage debt of $750,000, for a total of $2,250,000. The remaining $250,000 in subordinated debt and $1,000,000 in new equity are left for the unsecured creditors and shareholders to divide.

The Management of Magic Mobile Homes Has Proposed to Reorganize