Which of the following securities has a purely residual claim against a firm's cash flows?
A) preferred stock
B) callable bonds
C) common stock
D) non-callable bonds
E) None of the above.

Question

Quizplus · Accepted Answer

Common stock represents ownership in the company and holders of common stock have a residual claim on the company's cash flows. This means that after all other claims, such as debt payments and preferred stock dividends, have been satisfied, common stockholders are entitled to any remaining cash flows. Preferred stock has preference over common stock in the payment of dividends and in the event of liquidation, and non-callable bonds have a fixed claim on the company's cash flows. Callable bonds can be redeemed by the issuer before maturity, but holders still have a priority claim on the company's cash flows until the bond is called.

Which of the Following Securities Has a Purely Residual Claim