If the net worth (assets - liabilities) of a company is 100,000, and there are a 100 shares outstanding, then in the event of bankruptcy, if I hold 1 share of the company, am I guaranteed to get: 100,000/100 = 1000 $?

Is it true that after bankruptcy, the assets will be liquidated and divided among the shareholders? That is how I came up with the math.

  • 1
    Do you mean bankruptcy (where it can't pay its debts) or some kind of voluntary liquidation (where it's wound up for some other reason)? It's unlikely though not impossible for there to be net assets left in a bankruptcy. Apr 29 '15 at 20:26
  • Hmm...never thought of that...I guess I mean when a company is closing shop because of too many losses.
    – Victor123
    Apr 30 '15 at 13:48

All investors of equal standing get the same proportion of the net assets on bankruptcy but not all shareholders are of equal standing. In general, once all liabilities are covered, bond holders are paid first as that type of investment is company debt, then preferred stock holders are paid out and then common shareholders. This is the reason why preferred stock is usually cheaper - it is less risky as it has a higher claim to assets and therefore commands a lower risk premium. The exact payout schedule is very corporation dependent so needs research on a per firm basis.

  • i don't follow why preferred stock is cheaper... wouldn't investors value a less risky investment more?
    – user12515
    Apr 14 '20 at 6:49
  • @Michael no, higher risk means that there must necessarily be higher returns.Normally this doesn't necessarily mean that the price will be higher than another instrument but here we are talking about the same stocks in the same company just with different terms so the riskier investment will have a higher price. Think about it this way - no one would buy a riskier instrument unless they were compensated for the risk with higher returns.
    – MD-Tech
    Apr 14 '20 at 7:37

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