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About Shareholders and Debtors

The balance sheet of Company X is as follows:

In millions of USD:
Assets
Working capital 20
Investments 10
Total 30

Liabilities
1-year loan 25
Equity 5
Total 30

Which party (shareholders or debtors) wins if Company X:
a.) Distributes $10 million in dividends.
b.) Shuts down and sells its possessions. From working capital we get $20 million, but from investments only $6 million. All proceeds are invested in government loans.
c.) Invests $10 million into a project with an NPV of 0. In the possible case of a bankruptcy the debtors of the new loan have the same "rights" as the of the old one.
d.) The debtors of the 1-year loan decide to extend the pay-back period to two years.

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Which party (shareholders or debtors) wins if Company X:

a.) Distributes $10 million in dividends.
* In the event of dividend distribution, the shareholders are the winner since as partial owners in the company, dividend which is usually from earnings or profits, are also given to them as a return on equity and investment to them.

b.) Shuts down and sells its possessions. From ...

Solution Summary

The solution discusses about shareholders and debtors.

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