Textbook Problem

Of two corporations organized at approximately the same time and engaged in competing businesses, one issued $80 par common stock, and the other issued $1 par common stock. Do the par designations provide any indication as to which stock is preferable as an investment? Explain.

To determine

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receives a share of profit from the profits earned by the corporation.

To explain: which investment is better: common stock with a par value of $80 per share or common stock with a par value of $1 per share.

Explanation of Solution

Par value refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock. It is the minimum price at which a stock must be issued and is indiscriminately fixed by the corporation’s charter. Thus, it neither effects the market value of the share nor the investment decision of the investor. Hence, based on the par value, it cannot be decided that which stock is preferable as an investment.

Conclusion

Hence, either of the common stock could be a better investment depending upon the company’s profit generating ability.