You, a recapitalization specialist at the newly established Sour Deals department of First Morningside Corp., have been retained by the senior lenders to propose a recapitalization plan for the subordinated debt that would assure repayment of all senior notes in 5 years and as much of the subordinated notes as possible in 9 years from the present.

Propose a recapitalization plan for REFC and complete the cash flow projection shown below. What equity participation would subordinated-holders receive? What equity participation should be left for the original owners? What is the value lost by each class of security-holders? (You estimate that the company assets could be sold at a 4.0 times current EBITDA. Depreciation in year 1 was $25 million and was expected to stay at that level during the forecast period.)