Question

Explain the statement`` Common stockholders have a residual claim on the issuing firms assets``;Explain the difference between equity and debt.

Answer 1

Common Stockholders : These are the real owner of the company, Common Stockholders have the right to vote in the company and right to elect the directors in the company and opportunity to receive the dividends. If the corporation liquidates, than common stockholders receive their share of the proceeds of the liquidation after all creditors and preferred stockholders have been paid.

It Means at the time of liquidation stockholders will receive the only after the payment made to all lenders and preference shareholders. So if there is any residual balance left after the payment of all creditors and lenders and others than that will be distributed to common shareholders only.

Debt: Debt means the securities are issued to investors by the corporate and investors will receive the interest against there investment.

Difference in Debt and equity

1. Common Stockholders have the permanent source of finance because the amount received against the equity investment never be given back to investors. But the debt finance is a temporary finance which is raised by the company and payback after some time.
2. Common Stockholders have no renewal or repayment of the equity like loan taken from bank in debt.
3. There is no necessary to pay dividend every year so no burden for this on company but in the debt finance it is compulsory to pay the interest every year or as per the agreement.