When the Value of the Firm Is Above the Face

question 101

Multiple Choice

When the value of the firm is above the face value of the debt:

• A) the stockholders repay the debt and the equity is worth less than $0.
• B) the stockholders repay the debt and the equity is worth the difference between the firm value and the face value of the debt.
• C) the stockholders default and the lenders receive the value of the firm.
• D) the stockholders default and the equity is worth $0.

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Definitions:

Common Shares

A type of equity security that represents ownership in a corporation, with holders possibly entitled to dividends and voting rights.

Net Income

The ultimate earnings of a corporation after reducing total income by any expenses, taxes, and costs.

Prior Period Adjustments

Adjustments made to correct financial statements of previous periods due to errors or changes in accounting policy, ensuring accuracy in current financial reporting.

Statement Of Retained Earnings

A financial document that shows how a firm's earnings are reinvested in the business or paid out to shareholders.