Question

If a firm is liquidated, which is the correct order for claimants? (select all that apply)

a. common stockholders
b. bond holders
c. unpaid employees
d. preferred stockholders

Answer 1

In the event of a firm's liquidation, the correct order for claimants is unpaid employees first, followed by bondholders, preferred stockholders, and lastly, common stockholders. Employees are prioritized for their wages, bondholders have secured claims, preferred stockholders have a higher claim than common, and common stockholders are residual claimants.

Step-by-step explanation:

When a firm is liquidated, which means it is closing down and selling off its assets, there is a legally mandated order in which claimants to the firm's assets are paid. The correct order for claimants during liquidation is as follows:

1. Unpaid employees (for their due wages and benefits),
2. Bondholders (including those holding Treasury bonds),
3. Preferred stockholders, and finally,
4. Common stockholders.

Unpaid employees are often given highest priority to ensure that they are compensated for their labor. Bondholders are next since bonds are often secured debts, and the firm has a legal obligation to repay the amounts borrowed. Preferred stockholders have priority over common stockholders because preferred stocks typically have a fixed dividend rate and receive priority in asset distribution. Common stockholders, being residual claimants, are the last to be paid, receiving whatever assets remain, if any.