A firm has a value of 72 million if it is not liquidated and

A firm has a value of $72 million if it is not liquidated and a value of S56 million if it is liquidated. The firm has S48 million in senior debt outstanding and $40 million in junior debt outstanding. The firm proposes the following restructuring: senior debtholders exchange their debt for 70% of the firm\'s equity junior debtholders exchange their debt for 10% of the firm\'s equity equity holders keep 20% of the reorganized firm\'s equity Which of the security holders prefer this reorganization plan to what they would get in liquidation assuming that the Absolute Priority Rules (APR) would be followed in liquidation? (a)equity holders (b)senior debtholders (c)junior debtholders

Solution

If liquidated If reorganised Equity holders 0 14.4 Senior debtholders 48 50.4 Junior debtholders 8 7.2 Total 56 72 In liquidation first the senior debtholders are paid, than the junior debtholders and if any thing is remaining the equity holders would get The Equity holders would prefer the reorganisation plan as they would receive atleast 20% of equity which would otherwise to be received would be nil Senior debtholders and junior debtholders would not prefer reorganisation