Facile Fastener Company had the following liabilities and equity position when it filed for bankruptcy under Chapter 11 (in thousands):

After straightening out some operating problems, the company is expected to be able to earn $800,000 annually before interest and taxes. Based on other going-concern values, it is felt that the company as a whole is worth five times its EBIT. Court costs associated with the reorganization will total $200,000, and the expected tax rate is 40 percent for the reorganized company. As trustee, suppose that you have the following instruments to use for the long-term capitalization of the company: 13 percent first-mortgage bonds, 15 percent capital notes, 13 percent preferred stock, and common stock.
With the new capitalization, the capital notes should have an overall coverage ratio, after bank loan interest, of 4, and preferred stock should have a coverage ratio after interest and taxes of 2. Moreover, it is felt that common stock equity should equal at least 30 percent of the total assets of the company.
a. What is the total valuation of the company after reorganization?
b. If the maximum amounts of debt and preferred stock are employed, what will be the new capital structure and current liabilities of the company?
c. How should these securities be allocated, assuming a rule of absolute priority?

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Accounts payable Accrued wages Bank loan, 12% rate (secured by receivables) 500 200 600 $1,300 500 Current liabilities 13% First-mortgage bonds 15% subordinated debentures Total debt Common stock and additional paid-in capital Retained earnings 53,500 500 420 $4420 Total liabilities and equity