Which of the following is true regarding financial instruments?
A) Common stock typically cost less than Debt
B) Stock has limited liability
C) Common Stockholders have a senior claim over Debt Holders
D) Debt holders have voting rights
E) Common dividend payments are senior compared to Preferred Stock
Out of the options provided, the true statement regarding financial instruments is:
B) Stock has limited liability
This means that stockholders are only at risk for the amount they have invested in the stock and their personal assets are not at risk. This is in contrast to debt holders, who have a claim on the assets of the company and are at risk for repayment of the debt.
To determine which of the following statements is true regarding financial instruments, let's analyze each option and evaluate its accuracy:
A) Common stock typically cost less than Debt:
The cost of common stock and debt can vary widely depending on various factors such as the issuing company, market conditions, and investor demand. However, in general, the cost of debt (such as bonds or loans) tends to be lower than the cost of common stock. Therefore, option A is likely false.
B) Stock has limited liability:
Limited liability is a characteristic of owning stock. When an individual purchases stock in a company, they are typically not personally liable for the company's debts or obligations beyond the amount they invested. Therefore, option B is true.
C) Common stockholders have a senior claim over Debt Holders:
In the event of a company's bankruptcy, debt holders typically have a higher priority claim on the company's assets compared to common stockholders. Debt holders have a legal right to be repaid before common stockholders receive anything. Therefore, option C is false.
D) Debt holders have voting rights:
In most cases, debt holders do not have voting rights in a company. Debt holders are essentially creditors to the company and are typically not given the right to vote on company matters. Voting rights are usually associated with ownership of common stock. Therefore, option D is false.
E) Common dividend payments are senior compared to Preferred Stock:
Preferred stockholders have a higher claim on dividend payments compared to common stockholders. Preferred stockholders usually receive their dividends before common stockholders, giving them priority in receiving dividend payments. Therefore, option E is false.
In conclusion, the correct statement among the options provided is:
- Option B: Stock has limited liability.