Art purchased 2,500 shares of Delta stock. His purchase represents ten percent o

Question

Art purchased 2,500 shares of Delta stock. His purchase represents ten percent ownership in the firm. His shares have increased in value from the $12 a share he originally paid to today's market value of $23 share. Assume Delta goes bankrupt and owes $450,000 more in debts than the firm can pay after liquidating all of its assets. What is the maximum loss per share Art will incur on this investment? A. $0 a share B. $12 a share C. $17.50 a share, computed as ($12 + 23)/2 D. $23 a share E. $18 share, computed as (10% × $450,000)/2,500 shares

Explanation / Answer

Purchase price of one share = $12

Since Delta has become bankrupt and even after realising all assets, it still owes $450,000 to debt, hence nothing is left for the shareholders of Delta. Hence, shareholders will not be entitled to any payment at the time of winding up of the company.

Since Art purchased the shares at the price of $12/share, hence maximum loss of Art will be $12/per share.

Hence, correct option is (B) i.e.$12 a share.

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