Question
In: Finance
Does the residual claim have a positive or negative effect on the common stockholders? and why?
Does the residual claim have a positive or negative effect on the
common stockholders? and why?
Solutions
Expert Solution
Owning common stock is an effective way to benefit from the increases in equity in a company. Common stockholders have a few rights that come with owning stock in the company. One of the features of owning common stock is the residual right for company shareholders.
The right is the right to earnings, you are entitled to a share of the earnings. You are entitled to a share of the earnings of the company for as long as the company is in business or as long as you own the share of stock. This is provided in the form of regular dividends.
You also entitled to the assets of the company. you own a percentage of every asset that the company has. This means that if the company goes out of business, you will have a legal claim on any of these assets. During the bankruptcy process, the company will have its property liquidated to repay creditors and shareholders.
Therefore, having a residual claim is a positive for shareholders in case the company goes into bankruptcy
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