ECONOMICS
COMPETITION AND MARKET STRUCTURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The stockholders must also file for bankruptcy.
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The owners can force the board of directors to pay the debt.
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The owners can lose only the money they have invested.
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The owners can avoid paying the debt by forming a limited liability corporation.
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Detailed explanation-1: -The shares of a company that’s filed for bankruptcy take a huge hit and are almost always delisted from the stock exchanges. In such a scenario, you’re effectively stuck with the investment since there’s no way for you to sell your holdings. And, in quite a few cases, the shares become totally worthless.
Detailed explanation-2: -In the event you own stock of a company that files Chapter 7 bankruptcy, it will likely become worthless and it is unlikely you will recover any of your investment (see sidebar). Under Chapter 11 bankruptcy, there is slightly more hope that the company can survive and your stock will not become worthless.
Detailed explanation-3: -Stocks are able to lose all their value in the market, and have done so before, especially in the case of a bankruptcy. Even if a company does go bankrupt, in reality shareholders often do receive some residual payment back, but this is usually just pennies on the dollar.
Detailed explanation-4: -Preferred Equity Shareholders. Shareholders are often among the last creditors to receive liquidations proceeds. Preferred stock equity holders receive preferential treatment over common equity holders.
Detailed explanation-5: -In this period, the company cannot transfer its assets or raise cash by itself, no creditor or any other lender can initiate any legal proceedings or enforcement against the company. The common stockholders’ shares may reduce in value as the restructuring under insolvency affects the company’s share price.