The investor-supplied items—debt, preferred stock, and common equity—are called capital components. Which of the capital structure...

The investor-supplied items—debt, preferred stock, and common equity—are called capital components. Which of the capital structure components are considered the riskiest and which has the lowest risk? Explain.

Expert Solution

Common equity is the riskiest because common equity is not guaranteed any payment or dividend. Also, it is a residual claimant, which means that in the event of liquidation common equityholders will only be paid after other claimants have been paid.

Debt is the lowest risk because debt is guaranteed fixed payments in the form of coupon or interest. Failure on the part of company to pay results in the company being in default. And debtholders can drag the company in court for nonpayment. Also, in the event of liquidation debtholders will be paid before common equity and preferred equity.

jeff jeffy answered 2 years ago

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The investor-supplied items—debt, preferred stock, and common equity—are called capital components. Which of the capital structure...

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