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Stocks 105: The Purpose of a Company

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1.
A company's return on stock is calculated by _______.
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Adding capital gains and dividends. This is also known as total return.
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.
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.
4.
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.
5.
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?
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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.