Question

Given three possible investments in a company, an appropriate return for each would be: Capital creditor  6%7%8% , Preference share  7%8%6% , Common share  7%8%6% .

The reason why capital creditors have the  smallestlargestmiddle return is because  they get paid first and take the highest riskthey get paid first and take the lowest riskthey get paid last and take the highest riskthey get paid last and take the lowest risk . If you wish to have voting rights for a company's board of directors, you need to be a  preference shareholdercommon shareholdercapital creditor .

Part B

Company A has a share price of $0.02, $0 of earnings and 1 million shares outstanding. Company B has a share price of $200, $200 million in earnings and 20 million in shares outstanding. Company C has a share price of $36, $600,000 in earnings and 1 million in shares outstanding.

Given the above information,  Company BCompany CCompany A is the most expensive company and  Company ACompany BCompany C is the most likely to be a value stock.

Answer 1

An appropriate return for a capital creditor would be 6%. Similarly, appropriate return for a preference share is 7% and 8% for a common shareholder. The above conclusion is based on the fact that higher risk leads to higher returns and equity shareholders bear the highest level of risk, then comes preference shareholders and lastly capital creditors.

Capital creditors have the smallest return because they get paid first and take the lowest risk in terms of capital repayment.

In order to have voting rights, an investor needs to be a common shareholder because equity or common shareholders are generally considered to have voting rights in a company.

PART B