Discuss the various sources of long-term finances (Common stock, Preference stock, Bonds) with reference to their...

Discuss the various sources of long-term finances (Common stock, Preference stock, Bonds) with reference to their risk and return.

Expert Solution

Common stock is a type of security in which the shareholders are entitled to dividends that may vary in amount according to the profitability of the company. As the dividend depends on the performance of the company, the dividends/ return of the shareholder can be very high or very low, therefore, the risk involved in this source of long-term finance. This is the most expensive way to raise capital.

Preferred stock is a type of security in which the shareholders are entitled to a fixed dividend that does not vary with the profitability of the company. The returns are fixed under this source of capital so the risk involved is less in this security.

Bond is a type of security in which the bondholders are entitled to a fixed interest on the amount they have lent to the company and the company is obligated to pay the interest on time. The risk which the bondholders face are very low in comparison to both the Common stockholders and Preferred stockholders.

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