Question

Suppose an individual invests $10,000 in equity ownership of a public corporation. A year later, the corporation files for bankruptcy, owing hundreds of thousands of dollars to debtholders. What is the maximum loss this individual will take?

a) $10,000 plus a portion of the unpaid debt.

b) $0

c) $10,000

d) A percentage of the unpaid debt depending on the percentage of equity ownership.

e) None of the above.

Answer 1

The liability of shareholders of a company are limited. In case of Loss or bankruptcy the shareholders are not liable to pay more than their nominal value of shares.Shareholders may be asked to pay the uncalled capital or unpaid calls Over and above that shareholders will not be liable for any losses.

When a corporation files for Bankruptcy the shares of the company, becomes worthless and shareholders will not be able to sell the shares any more. Therefore the maximum loss to a shareholder will be only to the extent of amount paid for purchasing the shares. In this case it is $ 10000.

So there is no question of paying up any unpaid debt of the company by the shareholder. His loss would only the loss as the value of his shares has now become 0. Therefore the Purchase price being $ 10000 for the equity Ownership, has now become worthless and this is the maximum loss to the shareholder

Answer C $ 10000