The Simple Corporation has outstanding obligation to the Complex Corporation of $250. It is year-end and the total cashflow of Simple from all sources is $325. The contingent payoff to the debtholders and the equityholders is:
A) $250; $325
B) $75; $250
C) $250; $75
D) $325; $250

Question

Quizplus · Accepted Answer

The obligation to the Complex Corporation is a fixed obligation and must be paid before any residual cash flow is distributed to either debtholders or equityholders. Therefore, the contingent payoff to the debtholders is the remaining cash flow after the $250 obligation has been met, which is $75. The contingent payoff to the equityholders is the same as the remaining cash flow after the obligation has been paid, which is $75. Therefore, the answer is C.

The Simple Corporation Has Outstanding Obligation to the Complex Corporation