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Good day tutor,
The answer to this question (Doric Co 12/10) gave a financial position for part (ii) that excluded the reserves figure of $20m. Part (ii) asked for “An estimate of the income position and the value of Doric Co in the event that the restructuring proposal is selected. State any assumptions made.”
How did the examiner end up with a reserves figure of $0?
The question says that as part of the restructuring, the existing shares will be cancelled. Therefore the existing share capital and reserves will both disappear.
Instead the new shares appear – those that the existing shareholders pay for together with those issued to replace the unsecured bonds.
The reserves are initially zero – later they will increase if and as the ‘new’ company makes profits.
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