QUESTION In the case of liquidation common stockholders are

QUESTION: In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders. ANSWER OPTIONS: True False You need to specifically state IN THE SUBJECT LINE if the answer is TRUE or FALSE. EXAMPLES OF INADEQUATE RESPONSES: “I think the answer is False.” OR “The correct answer is “C.” Postings must be no less than 200 words in length to be considered. Any posting less than 200 words in length will not be reviewed.

Solution

There is a strict sequence in which the company\'s obligations are repaid in case of liquidation.

First secured debt such as bank loan with property as collateral is paid. Since there is collateral of the loan i.e. the company agreed to pay the loan in case of default using collateral, therefore secured debt are paid first.

After the secured debt has been paid, the unsecured debt such as bonds is paid as the company has agreed to pay the interest and the face value.

In the last shareholder are paid with preference given to preferred shareholders first and then the common shareholders.

Hence the Statement is False. The bondholder and preferred shareholders are paid first in comparison to common stockholders in the case of liquidation.