Could someone help me understand how to answer the following multiple choice question please: A trade creditor is owed £6,000 by a company that is in the process of being liquidated. The company was financed by £1m of ordinary shares, £2m of preference shares, £2.5m of retained earnings, £0.6m of secured debentures and £3.7m of other loans, including the trade creditor’s balance. The creditor hopes to recover 20% of the amount owed. How much would the company’s assets have to realise in order for this to happen? A £0.86m B £1.34m C £3.34m D £4.34m Thanks in advance!
Hi The secured debenture holders must be paid first, so the first £0.6m of assets are fully attributable to them. Assuming that all the other creditors rank equally, we must hope to realise enough further assets to repay 20% of the £3.7m of other loans. So, we need to realise: £0.6m + 20% of £3.7m = £1.34m The equity info is a red herring as shareholders rank after the trade creditors.
