1. Shareholders/stockholders are the owners of corporations, and they only recei

Question

1. Shareholders/stockholders are the owners of corporations, and they only receive benefits (typically dividends) after everyone else who has a claim on the corporation's assets/income has been paid first-for example, (i) suppliers who provide raw materials; (ii) providers of capital that is more senior to common stock, such as debtholders who are entitled to interest and principal payments for money lent to the corporation; and (ii) providers of labor, such as employees and consultants. Because they are paid last and entitled to everything left over after everyone else is paid, the profits to shareholders can be very high or zero. This high uncertainty and volatility of the cash flows to common equity makes common stocks risky, causing common stock to have a high expected rate of return to compensate shareholders for this high risk. (a) true (b) false

Explanation / Answer

The given statement/ para is true. If you picture a typical Profit & Loss, the shareholders are paid dividends after all the raw material payments, interest payments, etc. If their is preference share capital, even they are paid first out of earnings after tax before distribution of any dividends to the common stockholders.

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