Consider the Following Two Statements: (I) the Absolute Priority Rule

question 8

Multiple Choice

Consider the following two statements: (i) The absolute priority rule states that senior equity holders are paid in full before other claimants.
(ii) To rule out liquidation, management of a firm can favor a corporate bankruptcy.

• A)(i) is correct and (ii) is incorrect.
• B)(ii) is correct and (i) is incorrect.
• C)Both (i) and (ii) are correct.
• D)Both (i) and (ii) are incorrect.
• E)Bankrupt firms cannot continue to do business.

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Definitions:

Depletion

The allocation of the cost of natural resources over their productive life, commonly used in industries like mining and forestry.

Amortization

The gradual reduction of a debt or the spreading of an intangible asset's cost over its useful life.

Depreciation Expense

The allocation of the cost of a tangible fixed asset over its useful life, reflecting the asset's consumption or wear and tear.

Book Value

The net value of a company's assets minus its liabilities, often used to evaluate the worth of a company.