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Stocks 105: The Purpose of a Company

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1.
Given that bondholders are always paid before shareholders when it comes to a company's profits, what is the benefit to being a shareholder?
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There are potentially unlimited earnings possibilities. If a company is consistently profitable, the sky is the limit for shareholders.
2.
A company's return on capital is calculated by _______.
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Dividing profit by invested capital.
3.
Which of the following best defines a stock?
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A stock is an ownership interest in a company. Although companies receive money from stock offerings, it is more important to remember that a stock represents a stake in a company. Stocks should not be considered vehicles for speculative trading.
4.
According to Benjamin Graham, the father of value investing, in the long run the market is like a _______.
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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.
Which of the following is a benefit of a bondholder over a stockholder?
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If a company goes bankrupt, bondholders gets paid before stockholders. Stockholders are the "residual" claimants of a company's profits, which means they get paid after everybody else. If a company goes bankrupt, they get what's left over after all the creditors are paid. Bonds typically do not yield higher returns than stocks when a company does well. The government doesn't pay a company's interest on a corporate bond if the company can't pay for it--the company is responsible for the interest payment.