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Stocks 105: The Purpose of a Company

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1.
If a company is unable to pay its creditors back and goes bankrupt, stock shareholders will be first in line to get a claim on its assets.
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False. Stockholders will be last to get their claim. Creditors will be in line before them (but after the IRS, of course).
2.
When are shareholders entitled to get their cut of a company's profits?
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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.
3.
What is the purpose of a company?
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To take money from investors and generate profits on their investments. Companies do not guarantee that they will make investors rich quickly. Although bad management teams spend money on lavish corporate expenses, that shouldn't be the purpose of a company.
4.
A company's return on capital is calculated by _______.
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Dividing profit by invested capital.
5.
According to the father of value investing, Benjamin Graham, in the short run the market is like a _______.
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Voting machine. In the short run, the market sees the popularity of a company rather than its substance. A voting machine assesses its popularity.