Question

Consider a firm which has a value of $10 million if it is liquidated. The firm has $5.5 million senior debt and $7.5 million junior debt. The junior debt is comprised of 4m bond A due in 7 years and 3.5 million bond B due in two years

1.) How much do holders of bond A get in liquidation?

2.) How much do holders of bond B get in liquidation?

3.) How much do equity holders get in liquidation?

Answer 1

1). After paying to senior debt , the remaining liquadation value = S10,000,000 - $5,500,000 = $4,500,000

As the remaining value is less than the value of the junior debt and there is no indifference mentioned between bond A and B. So,Bond A's Holder will get proportionate portion, i.e., $4,500,000*(4,000,000/7,500,000) =$2,400,000.

2). Bond B's Holder will get proportionate portion, i.e., $4,500,000*(3,500,000/7,500,000) = $2,100,000.

3). Equity Holders' Liquidation Value will be equal to 0 as there is nothing left.