Delmont Inc owes 60 of debt due in one year. At that date its assets will be worth either 150 or 40. Given limited liability, the amounts shareholders receive in the two outcomes are:
Show the answer and explanation
Answer: C. 90 and 0
Good outcome: lenders are paid 60 in full and shareholders keep 150 - 60 = 90. Bad outcome: lenders take all 40 of the assets, a loss of 20 to them, and shareholders receive max(40 - 60, 0) = 0.
Why the other options are wrong:
A. 150 and 0 - This forgets that lenders must be paid their 60 before shareholders receive anything in the good outcome.
B. 90 and -20 - Limited liability means shareholders cannot lose more than their investment, so they never have to make up a shortfall.