Question

Choose the correct statement.

Claims by bond-holders are subordinated to those of the equity-holders, i.e. the company owners.

Shareholder’s liability extends to bond claims.

Dividends are taxed.

Equity gives an automatic right to receive dividends.

Answer 1

Option 1 is incorrect as Bond holders have a higher claim and equity holders only have a residual claim.

Option 2 is incorrect as shareholder's liability does not extend to bond claims and it is limited to dividend income, capital gains.

Option 3 is correct. Dividends are taxed. Depending on the entity, qualified and non qualified dividends have different taxation rates.

Option 4 is incorrect. Equity holders receive dividends only if the firm has distributable profits.