Question

Investors provides the necessary capital. What are the two main classes of financial assets they get in return and how are these recorded on the firm’s balance sheet? For each of the two financial assets, describe the overall source of its return today (where the money to pay them comes from) and overall source of the underlying risk?

Answer 1

Financial assets are the tangible liquid assets.

Example: Cash, stocks, bonds, bank deposits etc.

Types of Investors and what they get in return-

Bank- They provide loan to business and in return, they get interest that is income for bank. Banks keep property papers or assets as mortgage that they can sell in case of default in payment. "Interest is shown as an expense in the Income statement".

Preferred Shareholders- They invest into the company and gets preferred right in getting dividend and repayment of capital. "Preferred dividend is deducted from the net profit in the Income statement".

Common stockholders- They are the owners of the company who invest their money and get shares in return. They get dividend and capital appreciation. "Dividend is shown in the income statement, this is calculated on the net profit after deducting the preferred share dividend". "Dividend payable account is a current liability and shown in the balance sheet".

Bondholders- They are the creditors of the company, they buy bonds of the company and in return, they get fixed income in the form of interest that is shown "as an expense in the Income statement". "Interest payable is a current liability that is shown in the balance sheet under Liabilities head".

Personal investors- They are the founder, directors, owners, chairperson, CEO of the company who have the majority of shareholding in the company. They have voting rights and many other rights, they get dividend as income.

Investors are paid dividend, interest or other income out of the profits of the company.