Firm A and Firm B are identical except that A is incorporated while B is an unlimited liability partnership. Both have assets worth $500,000 ($500K)funded with a debt ratio of 40 percent. Suppose that the assets suddenly become worthless, what is the maximum possible loss to the equityholders of each company?
A)Firm A: $300K; Firm B: $500K
B)Firm A: $200K; Firm B: $300K
C)Firm A: $500K; Firm B: $200K
D)Firm A: $500K; Firm B: $500K

Question

Quizplus · Accepted Answer

For Firm A, since it is incorporated, the maximum loss would be limited to the amount of equity in the firm, which is $300K (60% of assets). For Firm B, since it is an unlimited liability partnership, the maximum loss would be the full $500K, as the partners are personally liable for the firm's obligations. Therefore, the answer is choice A.

Firm a and Firm B Are Identical Except That a Is