3671 Chapter 17

What are the differences in the claims of shareholders and bondholders during bankruptcy?

Bondholders claims are settled first. Bondholders have a fixed claim while shareholders have a variable claim on all the residuals

What is the most important benefit of debt?

It provides a tax benefit.

How does the concept of limited liability apply to shareholders?

Shareholders cannot be held personally liable for the debts of the corporation.

What are shareholders liable for if the firm is in financial distress and can pay only 80% of the payment due to the bondholders?

Since shareholders have limited liability, they are not personally responsible for the debt obligations of the firm.

The value of a firm is equal to the value of its:

debt plus equity

The two broad types of costs of financial distress are ___ costs.

direct and indirect

Which of the following are differences between interest payments and dividend payments by the corporation?

dividend payments are not an obligation but interest payments are an obligation dividends are paid to stockholders while interest is paid to bondholders dividend income is not fixed while interest income is generally fixed

The value of the firm is given by the following expression:

firm value = value of equity + value of debt

What is generally the most important component of direct costs of financial distress?

legal costs

One of the important reasons why firms choose to raise capital by issuing debt is because of the ______ benefits of debt.

tax