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 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.

Answer 1

The problem seems to be incomplete however i am assuming that the amount of the the libility reduced were stilll shown in the libility side and will be used as decided.

Furter after reducing the blances to the re-organization scheme reduced balance will also contradict with the required ratio of capital

then we asume that additional debt has been taken

still it does not come with the requirment of debt given hence either the question is incomplete and i am solving it with

	reroganization account
senior debt	1000000	new senior debt	1000000
subordinate debt	3000000	new commen stock holder	1075000
Comman stock holder	750000	(1000000 for subordinate debt
		+75000 for equity)
		new subordinated debt	1000000
		reduction in capital	1675000
		L15-SUM(L7:L11)
	4750000		4750000

	New balance sheet after reorganization
current assets	1400000	new senior debt	1000000
(1250000+150000)		new commen stock holder	1225000
subordinate debt	3500000	(1000000 for subordinate debt
		+75000 for equity)
		new subordinated debt	1000000
		reduction in capital	1675000
		L15-SUM(L7:L11)
	4900000		4900000

calculation of addiniol debt to be issued:

equity	1075000
expected debt	2150000
(1075000*3)/2)
accutal debt	2000000
balance to be issued	150000
2150000-2000000