ABC Corporation Is Financed by Both Debt and Equity

question 73

Multiple Choice

ABC Corporation is financed by both debt and equity.In its shareholder agreement, it promises to pay monthly dividends to all shareholders.Recently, it has come into some financial trouble and is having trouble making payments.Which of the following is true?

• A)ABC should pay dividends or risk bankruptcy.
• B)ABC should pay its creditors or risk bankruptcy.
• C)ABC must pay dividends or it risks being sued for breach of contract.
• D)ABC must pay both dividends and its creditors or risk bankruptcy.
• E)ABC should declare bankruptcy now to avoid any obligations it currently has.

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Definitions:

Bankruptcy Process

Refers to the legal proceedings involved in declaring an individual or business insolvent, allowing them to be discharged of some or all debt under the jurisdiction of bankruptcy courts.

Automatic Stay

A suspension of all judicial proceedings upon the occurrence of an independent event. Under the Bankruptcy Code, the moment a petition to initiate bankruptcy proceedings is filed, all litigation or other legal action by creditors against the debtor and the debtor’s property is suspended.

Litigation

The process of taking legal action in court to resolve disputes between parties, including lawsuits and arbitration.

Creditors

Individuals or entities to whom money is owed by debtors.