Question

What is the NPV of a publicly listed common stock? Of a bond? Given your answers, would you purchase a common stock and/or a bond?

Answer 1

Answer of the above question is given below.

Share issued with no par value specified either on the share certificate or in the issuer firm's charter or prospectus.

The objectives of its issuance include

(1) avoidance of taxes levied according to the share's face value,

(2) avoidance of the issuer firm's liability to shareholders in the event the shares have to be sold at a discount, and

(3) elimination of investor confusion over the par value and the real (market) value of the share. Cash proceeds from the share-sale are accounted for by debiting the cash account and crediting the capital share account, thus assigning an implicit value to the issued shares.

A public company is a company that has sold all or a portion of itself to the public via an initial public offering. The main advantage public companies have is their ability to tap the financial markets by selling stock(equity) or bonds (debt) to raise capital (i.e., cash) for expansion and other projects.

NPV is the sum of all the discounted future cash flows. In the case when all future cash flows are positive, or incoming (such as the principal and coupon payment of a bond) the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV).

The following formula is used to calculate NPV:

NPV=TVECF−TVIC

where:

TVECF=Today’s value of the expected cash flows

TVIC=Today’s value of invested cash​

According to me Common stocks are preferable than bonds because Common stock tends to outperform bonds and preferred shares. It is also the type of stock that provides the biggest potential for long-term gains. If a company does well, the value of a common stock can go up. But keep in mind, if the company does poorly, the stock's value will also go down.