Question

1. Ordinary shares: (a) represent a residual claim to the firm's assets in liquidation (b) mature on a predetermined date (c) have a return that is limited (d) are secured by the firm's assets in liquidation 1. 2. Dividend payments on ordinary shares: (a) rank ahead of interest payments on debt (b) can be paid if the firm makes a loss (c) are a tax deductible expense for the firm (d) can lead to default if not paid 3. Which one of the following statements about ordinary equity is true? (a) If the firm makes a profit then it must pay a dividend. (b) An investor's loss is limited. (c) Investors should expect lower returns on ordinary equity compared to debt. (d) Ordinary equity has a maturity date.

Answer 1

1. Ordinary shares represent ownership capital. So, just like an owner of business, the ordinary shares get last preference in case of liquidation after secured creditors, unsecured creditors and preference shareholders. Ordinary shares do not have a maturity date and can have unlimited returns if the firm makes profit. Ordinary shares are not secured by firm's assets . So, the correct option is the 1st one  i.e. Ordinary shares represent a residual claim on firm's assets in liquidation. i.e. whatever is left out after paying Creditors and preference shareholders