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 typically prefer that a firm avoids bankruptcy because, in the event of bankruptcy, the value of common shares often drops to zero, leaving shareholders with significant losses.

Shareholders Generally Prefer That a Distressed Firm