Question

Short answer 2-3 sentences:

explain the difference between debt and equity and why both must equal total assets.

why common stockholders are paid after preferred stockholders. (hint: Talk about that they are residual claimants)

Answer 1

Equity involves being the owner of the company by investing in the common stock of a corporation. It involves higher risk because they are the residual owners of the company and also equity prices are impacted largely by macro economic factors like GDP and interest rates wheres wheres debt instruments involve lower risk and is just like giving load to the company which will be paid with interest in future. It involves lesser risk with lesser reward compatibility. It involves investing in fixed income instruments like bonds.

The total assets of the company is equal to to equity and liabilities because any functioning of a company involves equity like cash, invesntories with elements of loans in the form of debt to work. Total assets is a sum of debt and equity.

Common stockholders are paid after preffered stockholders because they are the real owners or residual owners of the company which get paid or rewarded after other stakeholders of capital including debtholders and preffered stock holders are paid off.

I hope this helps you.please hit like button