If a firm goes bankrupt and must be liquidated, and if less money is available than the balance sheet values of bonds, preferred stock, and common equity, then some security holders will receive less than the book values of their investments. The priority system under our bankruptcy laws allocates funds first to preferred stock because of its preference, then to bonds, and then to common stockholders (only if there are funds left over after paying preferred stockholders and bondholders).

True or false?

Question

Trent Blake

Business

17 September, 13:19

If a firm goes bankrupt and must be liquidated, and if less money is available than the balance sheet values of bonds, preferred stock, and common equity, then some security holders will receive less than the book values of their investments. The priority system under our bankruptcy laws allocates funds first to preferred stock because of its preference, then to bonds, and then to common stockholders (only if there are funds left over after paying preferred stockholders and bondholders).

True or false?

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Answers (1)

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Simone Moses · Answer 1

False

Explanation:

In case of bankruptcy, the first payment with the funds available with the company is made to the third parties concerned, basically the creditors, debenture holders, any loans outstanding etc:

Then the funds are allocated to bond holders issued by the company, as they are also not part of ownership of company.

After that the company pays to preference shareholders for their shares and then to equity.

Preference share holders are in preference with to equity and to any kind of debt due on the company.

Thus, the statement in question is false.