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Stocks 105: The Purpose of a Company

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1.
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.
2.
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).
3.
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.
4.
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.
5.
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.
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