Sources of Funding - Business Finance - ثاني ثانوي

7.1 Sources of Funding Link to digital lesson Key Term Residual claim To obtain assets to operate, a company must find sources of funding through either equity or debt. Investors who own stock in a joint stock company have equity ownership. Joint stock companies, commonly called corporations, may also issue a variety of debt instruments, such as bonds and sukuk, to tap the funds of investors who purchase debt securities. A company's debt obligations have a prior claim to a company's earnings over equity. This means that a business must pay interest on debt before there are any earnings available to the owners. If the company is liquidated, debts must be paid first, and any remaining assets are distributed to the owners. Equity ownership, therefore, is a residual claim. As a residual claim, equity is riskier than debt. Common stock represents the final claim on the company's earnings and assets. While equity represents the residual claim, it is still a claim, and the managers and employees work for and are held responsible to the stockholders. 7.1a Equity Equity represents ownership of a company. If Fahd's company performs poorly, there may be little or no returns available to the owners. However, a profitable company can generate a large return for its owners, since after the debt obligations are met, the residual earnings accrue solely to equity owners. While there may be many different types of debt instruments, there are only two types of stock: common stock and preferred stock. As the name implies, preferred stock has a preferred or superior position. Exercises Choose the correct answer. 1. There are more than two types of stock. True/False 2. Common stock represents the initial claim on the company's earnings and assets. Duple www.dem.edu.sa Reptual clar A clarm to a share of earnings aiter a debt has been settled وزارة التعليم CHAPTER 7 Stocks and Bonds 269