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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which statement best describes the position of ordinary shareholders of a company on a winding up?

Ordinary shareholders rank last on a winding up. Creditors and then preference shareholders must be paid first, and ordinary holders receive only any surplus remaining. This residual position is why equity carries the highest risk and demands the highest expected return.

  1. AThey are paid before preference shareholders because they own the company
  2. BThey receive a fixed return ahead of all creditors
  3. CThey rank last and receive only what remains after all prior claims are settledCorrect
  4. DThey are entitled to the nominal value of their shares before unsecured creditors
  5. They share equally with debenture holders in the remaining assets

Explanation

Ordinary shareholders are residual claimants. Creditors, including secured and unsecured lenders, and then preference shareholders are paid first. Ordinary shareholders receive only the surplus, if any, which is why equity bears the highest risk.

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