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 be willing to exchange a portion of their debt for equity in a reorganized firm because they believe that the value of the stock may in the long run far exceed the amount of debt they were willing to forgive. This can provide them with a greater return on their investment than if they continued to hold onto the debt.

Why Would Creditors Be Willing to Give a Portion of What