Question

Which of the following provides the best description of common stock?

a. ownership rights to the full assets of a company

b. a fixed income securitiy with defined cash flows

c. a claim on residual earnings after all other claim holders have been paid

d. all of the above

Answer 1

Option (c) is correct

A common stock has a claim on residual earnings after all other claim holders have been paid. common stockholders have the residual interest in the company. in terms of priority of payments, common stock holders come last. Common stockholders will be paid when the claims of bondholders, creditors, preferred stockholders or any other liabilities have been paid.

Option (a) is incorrect as a common stockholder has ownership rights to the residual assets of the company.

Option (b) is incorrect as a common stockholder has not a fixed income because the company may or may not pay dividends in any year.So, it is not necessary that they get defined cash flows.