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One year ago, David B. bought 20,000 shares of Nuvo Tech, a publicly listed company, at...

One year ago, David B. bought 20,000 shares of Nuvo Tech, a publicly listed company, at $50 per share. His purchase represents 20 percent ownership in the firm. If Nuvo Tech is bankrupt and owes $300,000 more in debts than the firm can pay after liquidating all of its assets, what is the maximum loss per share David B. will incur on this investment? (Hint: consider the maximum loss for an equity investor, who invests in the shares of a company)

$0 a share $15 a share

$53 a share, computed as $50 + 20%*$300,000/20,000

$50 a share

$3 share, computed as (20% × $300,000)/20,000 shares

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Answer #1

COMPANY HAS DEBT OUTSTANDING EVEN AFTER LIQUIDATING ALL ITS ASSETS.

IT MEANS THAT COMPANY DOES NOT HAVE ENOUGH MONEY TO PAY DEBT HOLDERS

SO EQUITY SHAREHOLDERS ARE NOT GOING TO GET ANYTHING.

IN LIQUIDATION, EQUITY SHAREHOLDERS ARE PAID LAST. THE POSITION IS THAT COMPANY DOES NOT HAVE ENOUGH TO PAY EVEN DEBT HOLDERS. SO SHAREHOLDERS WILL NOT GET ANYTHING.

SO HIS TOTAL LOSS WILL BE $50 A SHARE

ANSWER : $50 A SHARE (THUMBS UP PLEASE)

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