Problem:
Firm A and Firm B are identical except that A is incorporated while B is an unlimited liability partnership. Both have assets worth $500,000 ($500K) funded with a debt ratio of 40%.
Required:
Suppose that the assets suddenly become worthless, what is the maximum possible loss to the equityholders of each company?
- Firm A: $200K; Firm B: $300K
- Firm A: $300K; Firm B: $500K
- Firm A: $500K; Firm B: $500K
- Firm A: $500K; Firm B: $200K
Note: Please explain comprehensively and give step by step solution.