Suppose B.O. Drug Co. decides to reorganize under Chapter 11. Generally, senior claims are honored in full

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Suppose B.O. Drug Co. decides to reorganize under Chapter 11. Generally, senior claims are honored in full before various other claims receive anything. Assume that the going concern value of B.O. Drug Co. is $3 million and that its balance sheet is as shown:Assets Liabilities Mortgage bonds Subordinated debentures Stockholders' equity $3,000,000 1,500,000 2,500,000

The firm has proposed the following reorganization plan:Old Security Mortgage bonds Subordinated debentures Old Claim $1,500,000 2,500,000 New Claim with

The firm also has proposed a distribution of new securities under a new claim with this reorganization plan:Old Security Mortgage bonds Debentures Received under Proposed Reorganization Plan $1,000,000 in 9% senior

However, it will be difficult for the firm to convince secured creditors (mortgage bonds) to accept unsecured debentures of equal face value. In addition, the corporation may wish to allow the old stockholders to retain some participation in the firm. Needless to say, this would be a violation of the absolute priority rule, and the holders of the debentures would not be happy.

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Corporate Finance

ISBN: 9781265533199

13th International Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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