The cash flows associated with common stock are more difficult to estimate than those related to bonds because the stock has a residual claim against the company versus a contractual obligation for a bond. True or False?

The answer is True.

Explanation:

Common stock holders is the firm's owner. Unless their voting rights is large enough, they will not have the power to demand certain dividend amount be paid out every year as it is at the firm's board of management authority. Moreover, common stock has perpetual lifetime which only ends when the company shut down and has residual claim against the company, thus, the recovery of initial investment in common stock is harder to estimate as it is usually the stock's price at exit time.

For bond, it is a contractual obligation, thus interest payment and face value repayment have been stated very clear in amount and in time and these payments are put into priority over common stock in the event of default.