Question

Which of the following parties receive the residual claim when bankruptcy does occur? a. preferred stockholders...

Which of the following parties receive the residual claim when bankruptcy does occur?

a. preferred stockholders

b. common stockholders

c. banks

d. debtholders

Which of the following is NOT the drawback of the discounted payback period?

a. It does not take into account the time value of money

b. it has no benchmark against which to compare the payback period

c. it also does not consider cash flows beyond the payback period

d. all of the above

d.

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Homework Answers

Answer #1

1) Order of payments when bankruptcy occurs

Legal expenses are paid

Liquidator's expenses

Debenture holders

Creditors

Preferential shareholders

Common stockholders

So, common stock holders receive the residual claim.

Option 'b' is correct

2) Advantage of Discounted payback period includes:

It considers the Time value of money

and considers the risks associated with the project's cash flow.

Whereas the drawbacks of discounted payback are it ignores the cash flows beyond the payback period. It does not consider the overall profitability of the project.

So, Answer is Option 'a' .

It does not take into account the time value of money. Because actually it considers the time value of money

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