Which one of the following statements is true?
A)Bondholders are generally granted voting rights equal to those of common shareholders.
B)Payments of both interest and dividends are tax-deductible as business expenses.
C)Unpaid common stock dividends can force a firm into liquidation.
D)Debt increases the possibility of financial distress.
E)Debt holders have a residual claim on a firm's assets.

Question

Quizplus · Accepted Answer

Debt increases the possibility of financial distress as the company has a legal obligation to pay back the debt and failure to do so can result in bankruptcy or other financial difficulties. A and B are not true as bondholders generally do not have voting rights equal to common shareholders and while interest payments are tax-deductible, dividend payments are not. C is also not necessarily true as unpaid dividends do not necessarily force a firm into liquidation. E is also incorrect as debt holders do not have a residual claim on a firm's assets, as they are paid before equity holders in the event of liquidation.

Which One of the Following Statements Is True