Final answer:
Common stockholders have residual claims on a company's assets and potentially higher rewards but face greater risks, whereas senior debenture holders have priority claims and fixed payments. If a company fails to make an interest payment on senior debt, it typically cannot pay dividends to shareholders.
Step-by-step explanation:
The difference between the common stock and a senior debenture of the same company lies in their claim priority and payment structure. Common stock represents ownership in a company and entitles shareholders to residual claims on the firm's assets and future cash flows, which means they are paid after all debts have been settled. Senior debentures, on the other hand, are a form of debt financing and provide creditors with priority claims over common shareholders when it comes to both the assets in case of liquidation and the payment of scheduled interest.
Assuming the company is successful, common stock has a greater potential for rewards due to its equity nature, which may include price appreciation and dividends. However, this comes with higher risk compared to the more stable, fixed returns of senior debentures.
If a company faces economic difficulty and cannot make a scheduled interest payment on its senior debt, legally, it often cannot pay dividends to shareholders. This is because debenture holders are paid before equity holders, and missing a payment on senior debt generally triggers restrictions on dividend payments to shareholders.