Question

Rank bonds, common stock, and preferred stock with regard to two factors the possibility of a substantial increase in value. Rank these same securities with regard to investors' legal claims for repayment on their investments.

Answer 1

Answer:

Possibility of increase in value:

(1) common stock

(2) preferred stock

(3) bonds

Legal claims: -

(1) bonds

(2) preferred stock

(3) common stock

Answer 2

Answer:

Possibility of a substantial increase in value-Common stock- preferred stock-bonds

Legal claims Bonds-preferred stock-common stock

Explanation:

When the value of the firm increases significant, it would first be felt by equity shareholders who are the real owners of the business as share price would also increase significantly giving the investors a high capital gains yield on their investment,followed by by preferred stockholders whose share price would also move in positive direction and would least be felt by holders of bonds

Bondholders have prior claims to repayment of their investment upon liquidation of the company as it is usually contained in the agreement between the company and the holders of bonds when bonds are issued.

The preferred stockholders are next line of claims and lastly the equity stockholders.