Why would creditors be willing to give a portion of what they are owed by the debtor firm for equity in the reorganized firm?
A) They are legally obligated to do so under U.S. bankruptcy law.
B) Ownership in a firm is inherently more valuable than being a creditor.
C) The value of the stock may in the long run far exceed the amount of debt the creditors were willing to forgive.
D) Creditors understand that they can sue the firm at a later date for what they are owed.
E) None of the above.

Question

Quizplus · Accepted Answer

Creditors may agree to convert their debt into equity with the expectation that the reorganized company will increase in value over time, making the equity worth more than the original debt amount. This decision is often made when creditors believe that the reorganization will successfully turn the company around, leading to a situation where the potential long-term gains from equity ownership outweigh the immediate returns from remaining a creditor.

Why Would Creditors Be Willing to Give a Portion of What