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Would senior creditors prefer propose reorganization plans

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Reference no: EM132992237

A company has a total value of $110 million if it is liquidated and $130 million if it is not liquidated. The company has $90 million in senior debt outstanding and $60 million in junior debt outstanding (these are the amounts that the company owes and not the market value of the debt). If the company is unable to restructure its debt, it will have to liquidate. If the company liquidates, liquidation proceeds will be distributed according to the Absolute Priority Rule (APR).

The company proposes the following restructuring plan to its creditors:

  • Senior creditors exchange their debt for 70% of the company's equity
  • Junior creditors exchange their debt for 20% of the company's equity
  • Existing shareholders keep 10% of the reorganized company's equity

Problem 1: Would senior creditors prefer the propose reorganization plan over what they would receive in liquidation? Would junior creditors? Would existing shareholders?

Reference no: EM132992237

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