Question

Q 11.28: Alfonzo and Wendy were arguing about whether their company should issue par value common stock or no-par value common stock. Alfonzo said that par value stock was better because they could use it to help set the market price of the stock. Wendy disagreed. Who was right and why?

Answer 1

Wendy is right

Step-by-step explanation:

The par value of a stock is a theoretical value that appears on some stock certificates. If this par value falls below the market price of the stock, then, the company will have to pay the difference to the investor.

For example, if the par value of the stock is $10, and the market price of the stock is $12, then, the firm will have to pay the $2 to the investor.

However, many firms issue extremely low par values to avoid this situation, as low as a $0.01 par value.

Par value has accounting implications, but they do not influence the market price of the stocks. The market price of a stock depends largely on other endogenous and exogenous variables and is much more complicated to calculate. This is why Wendy is right.