The Splitz Corporation has borrowed $5 million in debt with a promise to repay $5.5 million in one year. The corporation had 10 million shares outstanding worth $2 each at the time of the borrowing. Splitz earns $6 million during the year. What is the debtholder's contingent claim; how much do the debtholders receive; and, how much do the equity holders receive?
A) 5.5; 6; 20.
B) 5; 5.5; 0.
C) 5; 5.5; 20.
D) 5.5; 5.5;.5.

Question

Quizplus · Accepted Answer

The debtholder's contingent claim is $5.5 million, which is the amount promised to be repaid. They receive the full $5.5 million since the corporation earned $6 million, enough to cover the debt. The equity holders receive the remaining $0.5 million after paying the debt.

The Splitz Corporation Has Borrowed $5 Million in Debt with a Promise