Choose wisely. There is only one correct answer to each question.
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1.
When are shareholders entitled to get their cut of a company's profits?
After everyone else. This is one of the risks of being a shareholder -- you are always paid last. On the other hand, you get potentially unlimited earnings possibilities once you do get paid.
2.
Company A generates $500 million in profits and its return on capital is 10%. Company B generates $250 million in profits and its return on capital is 20%. Which company is more profitable?
Company B. Although Company A generates profits of $500 million, which is greater in absolute terms than Company B's $250 million in profits, Company A has a lower return on capital. For every $1 that investors put into Company A, they get back $0.10 in profits per year. However, for every $1 that investors put into Company B, they get back $0.20 per year.
3.
Given that bondholders are always paid before shareholders when it comes to a company's profits, what is the benefit to being a shareholder?
There are potentially unlimited earnings possibilities. If a company is consistently profitable, the sky is the limit for shareholders.
4.
According to Benjamin Graham, the father of value investing, in the long run the market is like a _______.
Weighing machine. In the long run, the market sees the substance of a company rather than its popularity. A weighing machine assesses the substance of a company.
5.
Why does a stock's price always match up so well so soon with the company's performance?
It doesn't, actually. The keys here are "always" and "so soon." Sometimes the price takes a while to accurately reflect the company's performance. This is due to the market's perception of the value of the company's future profits.
