Which of the following is the most risky position in the capital stack?

• A. Common Equity
• B. Senior Debt
• C. Mezzanine Debt
• D. Preferred Equity

Answer: (A)

The risk profile in a capital stack follows the order of claims: those at the bottom absorb losses first and get whatever remains after all higher-priority claims are satisfied. Common equity sits at the bottom, so it is the last to be paid in any cash flow distribution and the first to bear losses in a distress or liquidation. If a project generates enough cash to cover debt and other obligations, common equity owners still get the residual upside, but when cash is tight or leverage is high, there can be little or nothing left for them. In contrast, senior debt has priority and is typically secured, making it the least risky. Mezzanine debt sits between debt and common equity, with more risk and yield than senior debt but more protection than common equity. Preferred equity has a liquidation preference and often contractual distributions, so it sits above common equity in the waterfall but below all debt, making it less risky than common equity while still exposing investors to more risk than secured debt.