Final answer:
Shareholders are entitled to the residual value of a firm's cash flows, as they have partial ownership of the company through their stock holdings and may receive dividends if the company distributes profits.
Step-by-step explanation:
The residual value of a firm's cash flows is entitled to the shareholders. Shareholders, also known as stockholders, are individuals or entities that own shares of stock in a firm, thus holding a claim on partial ownership. When a company issues stock, unlike when it issues bonds, it does not have an obligation to make payments such as interest. Instead, shareholders may receive returns on their investment in the form of dividends when the company decides to distribute a portion of its profits.
Venture capitalists, who are private investors providing venture capital, often hold substantial portions of a company's stock, closely monitoring management and strategy, seeking substantial returns on their investments. However, shareholders are the last to be paid in the event of liquidation, after all debts and obligations, including to bondholders and the Internal Revenue Service, are settled. Therefore, shareholders have 'residual claims' to the firm's assets and earnings, meaning they are entitled to the earnings remaining after all other claims have been met.