Question
Firm A, under Chapter 11 bankruptcy proceedings, has an estimated going-concern reorganization value of $3.0 million. The last pre-bankruptcy balance sheet of the firm is
Firm A, under Chapter 11 bankruptcy proceedings, has an estimated going-concern reorganization value of $3.0 million. The last pre-bankruptcy balance sheet of the firm is below (this shows the old capital structure). Assume that there are no other claims from any party.
LAST PRE-BANKRUPTCY BALANCE SHEET
ASSETS
Current Assets $1,250,000
Fixed Assets 3,500,000
TOTAL ASSETS $4,750,000
LIABILITIES and NET WORTH
Senior Debt 1,000,000
Subordinated Debt 3,000,000
Common Stockholders Equity 750,000
TOTAL LIABILITIES and NET WORTH $4,750,000
Assume that the reorganized new capital structure must be 2/3 debt and 1/3 common equity, with $1,500,000 of the new debt subordinated to senior debt. After the fair distribution of the new securities under the reorganization:
a.
the old Senior Debt of $1,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with new Senior Debt of $1,000,000.
b.
The old Common Stockholders Equity of $750,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with new Common Stockholders Equity of $750,000.
c.
The old Subordinated Debt of $3,000,000 in the last pre-bankruptcy balance sheet will after the reorganization end up with new Subordinated Debt of $1,000,000, and new Common Stockholders Equity of $1,000,000.
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