Equity restructuring – NBC Institute

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Question

Mensimah LTD (Mensimah) has been experiencing poor trading conditions over the last three years. As a result, it has been difficult to generate revenues and profits in the current year leading to very high inventory levels. Also, Mensimah has defaulted in paying interest due to the loan note holders for two years. Even though the debentures are secured against the land & buildings, the loan note holders have demanded either a scheme of reconstruction or the liquidation of Mensimah.

As the above trading difficulties have significantly threatened the going concern status of Mensimah, the directors as well as representatives of the shareholders and loan holders in a meeting decided to design the following scheme of reconstruction:

The assets were independently valued and should now be recognised at the following amounts:

Asset Category Amount (GH¢)

Land 64,000

Building 64,000

Plant & Equipment 24,000

Inventory 40,000

The value of Mensimah’s investment in Adams LTD has increased to GH¢48,000 and was to be sold as part of the reconstruction scheme. As for the trade receivables, it was determined that 10% of the stated value is non-recoverable and therefore would be written off.
Each GH¢1 equity share is to be redesignated as an equity share of GH¢0.25. After this, the equity shareholders would be persuaded to accept a reduction in the nominal value of their shares from GH¢1 to GH¢0.25 per share and subscribe for a new issue based on one-for-one at a price of GH¢0.30 per share.
The existing 5% loan notes are to be exchanged for a new issue of GH¢28,000 9.5% loan notes, repayable in 2028, plus 112,000 equity shares of GH¢0.25 each. In addition, they will subscribe for GH¢7,200 loan notes, repayable in 2028, at par value at the rate of 9.5%.

The 8% loan notes holders who have not received any interest for the past two years, are to receive 16,000 equity shares of GH¢0.25 each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the fair value of the shares to be issued. Moreover, the 8% loan notes holders have agreed to defer repayment of their loan until 2028, on condition that they are paid a higher interest rate of 9.5%.
The deficit on retained earnings is to be written off and the bank overdraft is to be repaid immediately.

Asset Category	Amount (GH¢)
Land	64,000
Building	64,000
Plant & Equipment	24,000
Inventory	40,000

Mensimah’s statement of financial position as at 31 December 2023 is as follows:

Assets	GH¢’000
Non-current assets
Land & buildings	154,597
Plant & equipment	48,603
Investment in Adams LTD	21,600
Total Non-Current Assets	224,800
Current assets
Inventory	96,198
Receivables	56,554
Total Current Assets	152,752
Total Assets	377,552

Equity & Liabilities	GH¢’000
Equity
Equity shares (GH¢1)	160,000
Retained earnings	(31,857)
Total Equity	128,143
Non-current liabilities
8% loan notes	64,000
5% loan notes	56,000
Total Non-Current Liabilities	120,000
Current liabilities
Trade payables	89,798
Interest payable	10,240
Overdraft	29,371
Total Current Liabilities	129,409
Total Equity & Liabilities	377,552

Required:

i) Prepare the capital reduction account for Mensimah LTD.
ii) Prepare the statement of Financial Position of Mensimah LTD immediately after the reconstruction.
iii) Determine the position of each stakeholder group if the reconstruction scheme is not implemented.

Answer

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Tags: Capital Reduction, Equity restructuring, Financial Statements, Loan Notes
Level: Level 3

Topic: Corporate reconstruction and reorganisation
Series: Nov 2024

CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

Question

For some years now, Adonten has been reporting operating losses, principally due to competition from better models. Adonten is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch its new product. This product is tipped by technical experts to fare strongly on the market once launched.

The Statement of Financial Position as at 31 December 2021 is available:

Additional information:

Preference dividends have been in arrears for three years.
Retained earnings balance is to be eliminated.
The following details relate to the assets:
- Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
- Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
- A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
- Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
- One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.

Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Balance sheet restructuring, Capital reorganisation, Debt settlement, Equity restructuring, Financial strategy
Level: Level 3

Topic: Corporate reconstruction and reorganisation
Series: MAR 2023

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Question

The assets were independently valued and should now be recognised at the following amounts:

Asset Category Amount (GH¢)

Land 64,000

Building 64,000

Plant & Equipment 24,000

Inventory 40,000

The value of Mensimah’s investment in Adams LTD has increased to GH¢48,000 and was to be sold as part of the reconstruction scheme. As for the trade receivables, it was determined that 10% of the stated value is non-recoverable and therefore would be written off.
Each GH¢1 equity share is to be redesignated as an equity share of GH¢0.25. After this, the equity shareholders would be persuaded to accept a reduction in the nominal value of their shares from GH¢1 to GH¢0.25 per share and subscribe for a new issue based on one-for-one at a price of GH¢0.30 per share.
The existing 5% loan notes are to be exchanged for a new issue of GH¢28,000 9.5% loan notes, repayable in 2028, plus 112,000 equity shares of GH¢0.25 each. In addition, they will subscribe for GH¢7,200 loan notes, repayable in 2028, at par value at the rate of 9.5%.

The 8% loan notes holders who have not received any interest for the past two years, are to receive 16,000 equity shares of GH¢0.25 each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the fair value of the shares to be issued. Moreover, the 8% loan notes holders have agreed to defer repayment of their loan until 2028, on condition that they are paid a higher interest rate of 9.5%.
The deficit on retained earnings is to be written off and the bank overdraft is to be repaid immediately.

Asset Category	Amount (GH¢)
Land	64,000
Building	64,000
Plant & Equipment	24,000
Inventory	40,000

Mensimah’s statement of financial position as at 31 December 2023 is as follows:

Assets	GH¢’000
Non-current assets
Land & buildings	154,597
Plant & equipment	48,603
Investment in Adams LTD	21,600
Total Non-Current Assets	224,800
Current assets
Inventory	96,198
Receivables	56,554
Total Current Assets	152,752
Total Assets	377,552

Equity & Liabilities	GH¢’000
Equity
Equity shares (GH¢1)	160,000
Retained earnings	(31,857)
Total Equity	128,143
Non-current liabilities
8% loan notes	64,000
5% loan notes	56,000
Total Non-Current Liabilities	120,000
Current liabilities
Trade payables	89,798
Interest payable	10,240
Overdraft	29,371
Total Current Liabilities	129,409
Total Equity & Liabilities	377,552

Required:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Reduction, Equity restructuring, Financial Statements, Loan Notes
Level: Level 3

Topic: Corporate reconstruction and reorganisation
Series: Nov 2024

CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

Question

The Statement of Financial Position as at 31 December 2021 is available:

Additional information:

Preference dividends have been in arrears for three years.
Retained earnings balance is to be eliminated.
The following details relate to the assets:
- Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
- Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
- A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
- Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
- One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.

Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Balance sheet restructuring, Capital reorganisation, Debt settlement, Equity restructuring, Financial strategy
Level: Level 3

Topic: Corporate reconstruction and reorganisation
Series: MAR 2023

Question Tag: Equity restructuring

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CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

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CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Required:

CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

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CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

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CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

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CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

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CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation

Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.

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