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The common stock of a company must provide a higher expected return than the debt of the same company because?

 

there is less demand for stock than for bonds.

 

there is greater demand for stock than for bonds.

 

there is more systematic risk involved for the common stock.

 

there is a market premium required for bonds.

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Question added by Emad Mohammed said abdalla , ERP & IT Software, operation general manager . , AL DOHA Company
Date Posted: 2015/04/05
Anas  Dawah
by Anas Dawah , Senior Internal Auditor , Talal Abu-Ghazaleh Global (TAGI)

4------------------------------------

there is more systematic risk involved for the common stock.

Mohammed Shahid Ullah
by Mohammed Shahid Ullah , Executive Director (Finance) , Coal Power Generation Company Bangladesh Limited

There is more systematic risk involved for the common stock. Expected return will be higher due to high risk.

 

Emad Mohammed said abdalla
by Emad Mohammed said abdalla , ERP & IT Software, operation general manager . , AL DOHA Company

>>>>>>> there is more systematic risk involved for the common stock.

 

Islam Abd El Aziz
by Islam Abd El Aziz , Chief accountant , M.A.Kharafi & Sons

 

I agree that answer C is right one but let me give you wide explanation for the point

- debt for any co. either from 

1- Banks as loan   

2- public community as bonds, preferred stock , common stock

the diff. between this three as 

A- bonds it is issued by co. which has fixed interest rate or called also coupon rate & its paid at specific time as its written in coupon also if any bankruptcy bondholders have priorities

B-preferred stock which has interest rate "dividend  rate" higher than rate of bond but it is not paid  if there's no dividend this year- for that its risky more than bond also has second priority after for bankruptcy

C-common stock has not any interest rate also its not be paid unless there's dividend this year also has third priority after bonds & preferred holders if any bankruptcy happen for that it more risky and this is the clear reason make common stock holders ask for highest interest rate more than other which is called also "RRR" required rate of return " its not be written but its  known substantially cause if conmen stock holders fined themselves have lower interest rate simply they sell their stocks an that lead to lot of losses for the co.

 

Wolf Klaas Kinsbergen
by Wolf Klaas Kinsbergen , Managing Director, Designer , ingenieursbureau KB International NV

Dear experts, agree with you all reading the question and answer, because I honestly didn't know, so I have learned something

My answer is option (C) there is more systematic risk

Wasi Rahman Sheikh
by Wasi Rahman Sheikh , WAREHOUSE SUPERVISOR , AL MUTLAQ FURNITURE MFG

Answer will be there is more systematic risk involved for the common stock <<<<<<<<<<<

Gayasuddin Mohammed
by Gayasuddin Mohammed , Advocate , Practicing Law before High Court at Hyderabad

common stocks are got less priority than the debt of the company with reference to payment in case of winding up/ bankruptcy, so more risk involved with stocks.

the answer is -------there is more systematic risk involved for the common stock.

Deleted user
by Deleted user

Agree with choice of the experts

 

Nasir Hussain
by Nasir Hussain , Sales And Marketing Manager , Pakistan Pharmaceutical Products Pvt. Ltd.

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there is more systematic risk involved for the common stock.

khaled elkholy
by khaled elkholy , HR MANAGER , misk for import & export

there is more systematic risk involved for the common stock.......................................