Firm a and Firm B Are Identical Except That a Is

question 6

Multiple Choice

Firm A and Firm B are identical except that A is incorporated while B is an unlimited liability partnership. Both have assets worth $500,000 ($500K) funded with a debt ratio of 40 percent. Suppose that the assets suddenly become worthless, what is the maximum possible loss to the equityholders of each company?

• A)Firm A: $300K; Firm B: $500K
• B)Firm A: $200K; Firm B: $300K
• C)Firm A: $500K; Firm B: $200K
• D)Firm A: $500K; Firm B: $500K

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Definitions:

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash flow to recover the cost of the investment.

Salvage Value

The projected sum an asset is expected to fetch at the end of its service life.

Cost Savings

The reduction in costs achieved through efficiency improvements, strategic purchase, or avoiding unnecessary expenses.

CCA Class

In Canadian taxation, a classification system for capital assets that determines the rate at which they can be depreciated.