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Answer: Losses for both equity holders and debtholders are confined to their initial investment.
**Explanation:** - **Option A** is incorrect because the upside return potential for debtholders is capped at the interest and principal repayment, whereas equity holders can theoretically benefit from unlimited returns if the corporation succeeds. - **Option B** is incorrect because, from the issuer's perspective, debt is riskier than equity due to the legal obligations and potential for forced actions like bankruptcy. For investors, equity is riskier because shareholders are residual claimants. - **Option C** is correct because both equity holders and debtholders can lose no more than their initial investment. This principle reflects the limited liability feature of corporate structures.
Author: LeetQuiz Editorial Team
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Which of the following statements regarding corporations is most accurate?
A
The upside return potential is unlimited for both equity holders and debtholders.
B
Equity is considered riskier than debt from the perspectives of both investors and issuers.
C
Losses for both equity holders and debtholders are confined to their initial investment.
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