Question

ABC Inc. has $25,000 debt outstanding that it needs to pay in full by the end of next year. The firm’s shareholders hold claim to whatever is left after the debtholders’ claims have been satisfied. If the assets of ABC Inc. total $18,000 at the end of the year, how much can debtholders receive and how much can shareholders receive? How would your answers change if the assets total $23,000 and $42,000

Answer 1

FIRM'S SHAREHOLDERS ARE PAID LAST. SO THEY WILL PAID AFTER PAYMENT MADE TO DEBT HOLDERS.

CASE 1 : TOTAL ASSETS = 18000, DEBT OUTSTANDING = 25000

AS FIRM IS NOT EVEN IN A POSITION TO PAY TO DEBT HOLDERS FULLY, SHAREHOLDERS WILL NOT GET ANYTHING

AMOUNT RECEIVED BY DEBT HOLDERS = 18000 , AMOUNT RECEIVED BY SHAREHOLDERS = 0

CASE 2 : TOTAL ASSETS = 23000, DEBT OUTSTANDING = 25000

HERE ALSO FIRM IS NOT IN A POSITION TO PAY TO DEBT HOLDERS FULLY, SHAREHOLDERS WILL NOT GET ANYTHING

AMOUNT RECEIVED BY DEBT HOLDERS = 23000 , AMOUNT RECEIVED BY SHAREHOLDERS = 0

CASE 3 : TOTAL ASSETS = 42000, DEBT OUTSTANDING = 25000

HERE ALSO FIRM IS IN A POSITION TO PAY TO DEBT HOLDERS FULLY, AND AMOUNT LEFT IS 17000 WILL BE PAID TO SHAREHOLDERS.

AMOUNT RECEIVED BY DEBT HOLDERS = 25000 , AMOUNT RECEIVED BY SHAREHOLDERS = 17000

(THUMBS UP PLEASE)