2. Critically explain the following statements:

1. The equity of a firm provides a cushion against losses by creditors and preference stockholders.

[15 marks]

2. The common stockholders will have the option of defaulting on their debts and turning over the firm to the debtholders.

[15 marks]

3. Risk bearing and certification are the two important job functions performed by investment banks while they provide underwriting services.

[25 marks]