Bankruptcy typically results in the transfer of value from shareholders to bondholders, as bondholders generally have a higher priority claim on a company's assets. This is the reason why bondholders may recover some of their investment while equity holders may lose everything.

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Bankruptcy

Question 37

Multiple Choice

Bankruptcy:

A) creates value for a firm.
B) transfers value from shareholders to bondholders.
C) technically occurs when total equity equals total debt.
D) costs are limited to legal and administrative fees.
E) is an inexpensive means of reorganizing a firm.

Correct Answer: