EV Question - Shareholders
I have always thought that the shareholders were the owners of the business and the bondholders didn't own it, but had a legal claim to certain cash flows. But last semester I took the intro finance class at my university where my professor used the lingo that shareholders only own a claim agains the business- the residual claim. He said similarly, the bondholders own a different claim- a fixed claim on future cash flows. OK, fair enough. But, I am now sorta confused conceptually about bond vs stockholders. If one thinks of the business in terms of the enterprise, then the shareholders don't really own it, they just own a certain part of it, similarly to how the bondholders own a different part.
As you can tell, I am a little confused conceptually about the enterprise value and who actually is the owner of the business. Any help would be appreciated.
No wonder PSCM is taking it on the chin...
Equity holders are the owners of the firm because they make the decisions. Debt holders are paid first because debt is senior in the capital structure (that's just the way it is). After debt holders are paid, equity holders are paid (the residual claim). If the firm goes bankrupt, debt holders become the owners of the firm. Until then, debt holders don't make the decisions for the firm.
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