Saturday, April 18, 2009

matching savers and borrowers: Debt and Equity(3)

Equity owners generally receive periodic payments ( usually once each quarter ) from the firm , known as dividends. if the business does exceptionally well, equity owners receive more , while the debtholders still still get only their promised payment. however,if the business ’s profits are weak , there may be nothing left after payments to debtholders are made . If you buy shares in Oopsco and it loses money , do you have to pay the firm ’s losses ? No. shareholders in corporation can lose only the mount of funds they invest in the venture . we examine the relative merits of using debt or equity to finance businesses , and we use economic intuition to explain major development in the use of debt or equity.
Although you hear about the stock market ’s fluctuations each night on the evening news, debt instruments actually account for more of the funds raised in the financial system. at the beginning of 1993 , the value of debt instruments was about $11.5 trillion versus $5.1 trillion for equities.

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