Aiyah, Inc. recently has had financial difficulty and is being liquidated by the Federal Bankruptcy Court. The firm has a liquidation value of $1,000,000-$400,000 from the fixed assets that served as collateral for the mortgage bonds and $600,000 from all other assets (all prior claims have been satisfied). The firm's current capital structure is as follows: The common stockholders will receive ________ in the liquidation.
A) $500,000
B) $333,333
C) $198,000
D) $0

Question

Aiyah, Inc. recently has had financial difficulty and is being liquidated by the Federal Bankruptcy Court. The firm has a liquidation value of $1,000,000-$400,000 from the fixed assets that served as collateral for the mortgage bonds and $600,000 from all other assets (all prior claims have been satisfied). The firm's current capital structure is as follows:  The common stockholders will receive ________ in the liquidation.
A) $500,000 
B) $333,333 
C) $198,000 
D) $0

Quizplus · Accepted Answer

As per the capital structure given, the common stockholders are the last ones to receive their claims in case of liquidation. Since all prior claims have already been satisfied and the remaining liquidation value is only $600,000, which is less than the preferred stock and bondholders' claims, the common stockholders will not receive anything in the liquidation process. Hence, the answer is D, $0.