Question
Which of the following statements is NOT true about ordinary shares: Ordinary shareholders receive dividends only after lenders and preference shareholders have received their interest and dividends. Ordinary shareholders expect a low rate of return as their investments are considered less risky in comparison to preference shareholders and lenders. The potential gains for ordinary shareholders are unlimited Ordinary shareholders are not entitled to a fixed rate of dividends.
Answer
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Reid
Professional · Tutor for 6 years
Answer
Ordinary shareholders expect a low rate of return as their investments are considered less risky in comparison to preference shareholders and lenders.
Explanation
## Step 1: Understanding the four statementsThe key here is to understand each of the four given statements and then try to look for inaccuracies, if any, in the context of ordinary shares.## Step 2: Analysing each statement carefully1. Ordinary shareholders in a company are the last to be paid, only after lenders and preferred shareholders receive their respective interests and dividends. This statement tends to highlight the risk of owning ordinary shares and is, indeed, factual. 2. Assertion number two suggests that ordinary shareholders expect a reduced yield on their investment due to the risk being lesser as compared to preferred shareholders or lenders. This is inaccurate, given that ordinary shareholders bear the inherent speculative risk and hence tend to expect higher potential return. 3. Statement three discusses about the ceiling limit on the potential gains of ordinary shareholders. It correctly alludes to the unlimited upside potential, subject to the company's prosperity. 4. Finally, the fourth statement simply underlines the lack of assured dividends for ordinary shareholders unlike fixed dividends to preferred shareholders. Which is true because dividends can only be distributed out of distributable profits and that is not guaranteed. # ConclusionLooking at the comparisons of each declaration against the features, we can infer that the second supposition deviates from truth about ordinary shares.