If a firm has debt outstanding the contingent claim of an equity shareholder is:
A) equal to the payment to the debtholders
B) equal to the firm cash flows minus the fixed debt payment if the residual cash flows are positive
C) equal to the firm cash flows minus the fixed debt payment whether positive or negative
D) equal to the debt payment plus the residual cash flow of the firm.

Question

Quizplus · Accepted Answer

Equity shareholders have a claim on the residual cash flows of the firm after fixed debt payments have been made. This means if the residual cash flows are positive, equity shareholders receive the amount left after debt obligations are met. If the residual cash flows are negative, equity shareholders receive nothing, as they cannot claim more than what is left after debt payments.

If a Firm Has Debt Outstanding the Contingent Claim of an Equity