Question

what is difference between

1) Bond Vs Common Shares Vs Preferred shares

2) Maximum Profit Vs Shareholder Wealth

3) Cash Flow Vs Accounting Profit

Answer 1

Answer(1): Bond- It is a debt instrument that is used to raise funds. People who purchase company's bonds are called Bondholders. Company pays regular and fixed interest to Bondholders, bondholders get interest as income and they also have first or primary right to get the repayment of capital if company gets liquidated. Bond is a liability for company as it has to repay the amount of bond.

Common shares- These shares have ownership in the company, common shareholders are the owners and have voting rights. They get dividend but they only get dividend after paying interest to bondholders and paying dividend to preferred shareholders. They get the last right to receive the capital repayment if company gets liquidated.

Preferred stocks- As the name suggests, these shares are given preference in dividend as well as capital repayment. Preferred shareholder do not have voting rights and they are not owners of the company.

Answer(2): Profit maximization- Each and every company's primary motive is to achieve maximum profit, company keeps its cost low so that profit can be increased. This is a traditional concept, company and company's people work for a common goal that is profit maximization. This concept is beneficial for managers.

Wealth maximization- This is a modern approach which most of the companies are adopting nowadays. Shareholders are the owners of the company, they want something in return, they only get dividend out of the profits. If company's share price is not increasing, they cannot sell shares and will not get capital appreciation so to boost the price of company's share, company repurchases its own shares from the stock market so that per share value can be increased. This gives capital appreciation to shareholders and their wealth increases.

Answer(3): Cash flow- It refers to the cash revenues minus cash expenses. This tells the net cash flow in the company. Cash is an important element of company. It does not take into consideration the non cash items. This is better approach to evaluate the viability of a project. It reflects the actual net cash flow.

Accounting profit- It is the net profit that comes by subtracting all the expenditures (including non cash) from the revenues. It takes into account the non cash items as well like depreciation. Accounting profit does not reflect the net cash flow, needed for an investment in project.