Question

Suppose Osvaldo decides to use $8,000 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. Suppose Warm Breeze, a cloud computing firm, is selling stocks to raise money for a new lab. This practice is called _____ finance. Buying a share of Warm Breeze stock would give Osvaldo _________________ the firm. In the event that Warm Breeze runs into financial difficulty, _____________________ will be paid first.

Answer 1

Osvaldo's investment in Warm Breeze stock is an example of equity finance, granting him ownership in the company, with the understanding that bondholders are prioritized in financial recoveries.

Step-by-step explanation:

Osvaldo's decision to invest his $8,000 savings in stocks, particularly in Warm Breeze, a cloud computing firm, represents equity finance. By purchasing shares of Warm Breeze, Osvaldo becomes a partial owner of the company. Equity investors, like Osvaldo, hold ownership stakes in the business and may benefit from potential profits through capital appreciation and dividends.

However, it's important to note that in the event of financial challenges or bankruptcy, bondholders take precedence over equity investors. Bondholders are creditors who have lent money to the company by purchasing its bonds. In times of distress, the company must prioritize repaying its debts to bondholders before distributing any remaining value to equity investors. This risk hierarchy underscores the difference in the nature of returns and levels of security between debt and equity investments, emphasizing the potential advantages and risks associated with Osvaldo's decision to pursue equity finance in Warm Breeze stocks.