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 $5 million during the year. What is the debtholder's contingent claim; how much does the debtholder receive; and, how much do the equity holders receive?
A) 5; 5.5; 20.
B) 5.5; 5; 0.
C) 5; -.5; 20.
D) -.5; 5; 0.

Question

Quizplus · Accepted Answer

The debtholder's contingent claim is $5.5 million. However, since Splitz only earns $5 million, the debtholder receives $5 million, and the equity holders receive $0.

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