Shareholders generally prefer that a distressed ﬁrm:
A) Undergo reorganization under the Bankruptcy and Insolvency Act because the common stock generally recoups its value.
B) Undergo liquidation under the Bankruptcy and Insolvency Act because they have ﬁrst priority over the ﬁrm's assets.
C) Undergo reconstitution under the Bankruptcy and Insolvency Act because that option usually minimizes shareholder loss.
D) Not declare bankruptcy because they are generally required to convert their shares into debt securities.
E) Not declare bankruptcy since the common shares are often rendered worthless.

Question

Quizplus · Accepted Answer

Shareholders generally prefer that a distressed firm not declare bankruptcy because common shares are often rendered worthless in bankruptcy proceedings, as creditors have priority over shareholders.

Shareholders Generally Prefer That a Distressed ﬁRm