Question Tag: Corporate Reconstruction

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  • 15 Marks

CR – May 2018 – L3 – Q3 – Corporate Reconstruction and Reorganisation

Evaluate two schemes for restructuring a microfinance company and discuss the advantages of each scheme.

Bank of Ghana (BoG) recently announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company, has been affected by the increase in players in the Micro Finance Industry, which has seen a reduction of its loan portfolio and an increase in loan default rate. A statement of financial position recently prepared by Capital Link is provided:

Statement of Financial Position as at 30th April 2017

Additional information: Depositors are uncertain about the ability of Capital Link to raise the required capital. Management of Capital Link has proposed two options for the company’s future:

  • Scheme 1 – Close Down Mission:
    Unity Capital Ltd has offered GH¢600,000 for the leasehold property. The loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills are valued at GH¢465,000. Liquidation expenses are estimated at GH¢30,000, and interest to depositors is GH¢330,000.
  • Scheme 2 – Rescue Mission:
    Management has proposed to implement a rescue scheme that includes a GH¢600,000 loan from a distress fund set up by an NGO. The loan terms include paying GH¢375,000 to the NGO immediately, with the balance exchanged for a 20% debenture repayable over four years.

Assume:

  • Current borrowing rate is 14%.
  • The present value of GH¢1 receivable at the end of each year is:
Year 14% 20%
1 0.88 0.83
2 0.77 0.69
3 0.67 0.58
4 0.59 0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme. (12 marks)
b) Discuss TWO advantages of each scheme. (3 marks)

 

a) Numerical Evaluation of Recovery:

Scheme 1 – Close Down Mission:

b) Advantages of Each Scheme:

Scheme 1 – Close Down Mission:

  1. The cash flows from liquidation can be estimated with a high degree of certainty, especially with a firm offer for the leasehold property.
  2. The bank recovers a significant portion of its loan quickly and avoids future risk exposure to Capital Link’s performance.

Scheme 2 – Rescue Mission:

  1. The bank retains a customer and avoids negative publicity that may arise from shutting down a local business.
  2. The potential recovery from the debenture provides an opportunity for additional returns, particularly if Capital Link recovers successfully in the future.
  • 20 Marks

CR – Nov 2019 – L3 – Q4 – Corporate Reconstruction and Reorganisation

Evaluate the liquidation and reconstruction options for Mahadi Ltd and prepare the statement of financial position after reconstruction.

Mahadi Ltd has operated profitably in Ghana for several years but is now facing financial difficulties after recording losses in its operations recently.
The company’s statement of financial position as at 30 September 2019 is given below:

Mahadi Ltd Statement of Financial Position as at 30 September 2019 GH¢
Non-current Assets
Freehold property 68,000
Equipment 468,000
Total Non-current Assets 536,000
Current Assets
Inventories 120,000
Total Assets 656,000
Equity and Liabilities GH¢
Equity
Stated capital (400,000 ordinary shares issued at 25 pesewas per share) 100,000
Capital surplus 68,000
Retained earnings (40,000)
Total Equity 128,000
Non-current Liabilities
10% debenture stocks 48,000
Current Liabilities
Sundry payables 412,000
Bank overdraft (from Northern Rock Bank) 68,000
Total Liabilities 656,000

Additional Information:

  1. Mahadi Ltd operates several retail outlets for snack bars, most of which are rented out. The company’s largest supplier, Banda Ltd, holds all of the debenture stocks and is also a trade creditor for GH¢240,000 included in sundry payables. The sundry payables also include GH¢44,000 owed to the Ghana Revenue Authority (GRA).
  2. The bank overdraft is secured by a fixed charge over the freehold property, and the debenture stock is secured by a floating charge over the company’s assets.
  3. On October 1, 2019, Mahadi Ltd has scheduled a meeting of stakeholders to consider the following two proposals:
    • Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
      Realised Assets GH¢
      Freehold property 56,000
      Equipment 204,000
      Inventories 40,000
    • Proposal Alternative 2 (Reconstruction): Banda Ltd proposes to allow the company to continue operating as a going concern with the following actions:
      • Convert the debenture stock into 48,000 ordinary shares (issued at GH¢1.00 per share).
      • Convert trade debt owed to Banda Ltd into 110 ordinary shares (issued at GH¢1.00 each) for every GH¢200 owed, and the balance of the debt would be written off.
      • Existing shareholders would receive one ordinary share for every five held.
      • Banda Ltd would subscribe for an additional 140,000 ordinary shares at GH¢1.00 each for cash to improve liquidity.
      • The fair value of the freehold property and inventories approximates their carrying value.
      • The management of Banda Ltd expects that after reconstruction, Mahadi Ltd would earn a regular net profit of GH¢54,000 per annum.

Workings:

  • Shareholding in the Reconstructed Company:
Shareholders No. of Shares GH¢
Banda Ltd:
– Conversion of debentures 48,000 48,000
– Conversion of trade debt 132,000 132,000
– New shares subscription 140,000 140,000
Existing shareholders (1-for-5 exchange) 80,000 80,000
Total 400,000 400,000

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