Start reviewing and responding to the postings of your classmates as early in th

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Start reviewing and responding to the postings of your classmates as early in th

Start reviewing and responding to the postings of your classmates as early in the week as possible. Respond to at least two of your classmates.  Participate in the discussion by asking a question, providing a statement of clarification, providing a point of view with a rationale, challenging an aspect of the discussion, or indicating a relationship between one or more lines of reasoning in the discussion. 
Do you agree with their position? Why or why not?
STUDENT 1:
Kassandra Coleman
When looking at investing there are a variety of opportunities. Some of these opportunities come by common stock, preferred stock, and bonds. However, before deciding where to place your money you should examine the pros and cons of each. 
When looking at common stock one of the advantages is that it’s a “form of ownership in a corporation” (Chen, 2022) which can give you voting rights and at least a sense of control or participation in the company. A disadvantage of common stock is that it can be volatile and one “should diversify their portfolios by putting money into different securities based on their tolerance for risk” (Chen, 2022). The next item is preferred stock which is “pays a cash dividend expressed in terms of dollars per share. Preferred stock has a preference over common stock in the payment of dividends and in the distribution of corporation assets in the event of liquidation” (Jordan, S.R.R.W.J.J. B., 2021). A con of preferred stock is that it essentially debt “Like debt, preferred stock does not benefit from upside growth in the firm’s value above and beyond the firm’s ability to pay the stated dividends” (Jordan, S.R.R.W.J.J. B., 2021). Last, we can examine bonds which interest-only loan, meaning that the borrower will pay the interest every period, but none of the principal will be repaid until the end of the loan (Jordan, S.R.R.W.J.J. B., 2021). Although that sounds like a stable investment “interest rate risk and credit risk are two of the main risks” (Martin, 2024) associated.
With all this information to consider one may ask why someone would select an investment bond over common stock? Especially when considering that your investment in common stock would give the higher return. This would come down to the individual when deciding how much risk they are willing to take with their financial investments. If you want low risk and are okay with low reward, then bonds are preferable to common stock.
Ultimately, it is in the individual and a firm’s best interest to diversify its financial portfolio to compensate for risk. In some cases, a firm may decide they want to issue preferred stock over others, “preferred shares are an asset class somewhere between common stocks and bonds, so they can offer companies and their investors the best of both worlds” (Norris, 2021). Preferred stock is the middle ground between common stock and bonds which means the risk is lower but so is the reward. Companies can offer these as there is a market for them “shareholders are attracted to preferred stocks because they offer more consistent dividends than common shares and higher payments than bonds” (Norris, 2021). This makes it easier for a company to raise funds when needed.
When fundraising as a company or looking for a potential investment the goal is to increase your monetary gain, but an investor and a company will differentiate on how to go about these investments. The biggest difference would be in the amount of risk a firm or individual is willing to take when making an investment or pursuing funds. To mitigate these risks both should diversify where funds are placed.
Finally, when a company utilizes the capital budgeting methodologies, they typically utilize the internal rate of return (IRR) or the net present value (NPV) methods. The IRR is “ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time” (Fernando, 2024) but the IRR can be “misconstrued or misinterpreted if used outside of appropriate scenarios” (Fernando, 2024). The other formula is the NPV to evaluate a company. The NPV “the value of an investment by calculating the difference between the present value of cash inflows and the present value of cash outflows over a specified period” (Tamplin, 2023) this helps determine “profitability and viability of potential investments or projects” (Tamplin, 2023). A con of utilizing the NPV is the accuracy of the cash flow when deciding.
In conclusion, regardless of the size or typer of firm you are investing in or fundraising for there is no guarantee that you will have a safe investment. You can only make a sound investment by utilizing a variety of methodologies to assess the risk and by diversifying your financial portfolio to limit those risks.
References:
Chen, J. (2022, April 27). Common Stock Definition. Investopedia. https://www.investopedia.com/terms/c/commonstock.asp
Fernando, J. (2024, March 14). Internal Rate of Return (IRR) Rule: Definition and Example. Investopedia. https://www.investopedia.com/terms/i/irr.asp
Jordan, S.R.R.W.J.J. B. (2021). Corporate Finance (13th ed.). McGraw-Hill Higher Education (US). https://digitalbookshelf.southuniversity.edu/books/9781264112180
Martin, C. (2024, January 9). What are Bonds? Understanding Bond Types and How They Work. Schwab Brokerage. https://www.schwab.com/learn/story/what-are-bonds-understanding-bond-types-and-how-they-work
Norris, E. (2021, December 14). Why Would a Company Issue Preferred Shares Instead of Common Shares? Investopedia. https://www.investopedia.com/ask/answers/042015/why-would-company-issue-preference-shares-instead-common-shares.asp
Tamplin, T. (2023, July 12). Net Present Value (NPV) | Definition, Calculation, Pros, & Cons. Finance Strategist. https://www.financestrategists.com/wealth-management/valuation/net-present-value-npv/
STUDENT 2:
Amanda Dennis
When a company reports earnings, there is an order where investors are paid out (CFI, n.d.). From an investor’s standpoint, there are both advantages and disadvantages of common stock, bonds, and preferred stock. 
Advantages
Preferred stock offers investors ownership in the company that issues the stock. Like a bond, preferred stock will pay a fixed dividend as long as the investor owns it. In addition, preferred stock owners will receive their dividend payout before common stockholders. 
Investors who own common stock also have ownership of the company and voting rights within the company. In addition, common stockholders will also receive a dividend payout. The common stock also offers more potential for long-term price appreciation. 
Bonds have a predictable income stream. If an investor holds a bond until maturity, they will receive their entire principal back. Bonds are also a way to offset any volatile stock holdings. 
Disadvantages
A major drawback of preferred stock is not having voting rights within the company. Having voting rights can ensure you have a say in what direction the company is heading. Another disadvantage of an investor having preferred stock is that preferred stock is less liquid than common stock, meaning it could prove difficult to liquidate it if the investor wants to sell the stock. 
Common stock dividends can be sporadic. The payouts can be less frequent as compared to preferred stock. Dividend payouts are also affected by the market. However, the biggest disadvantage of common stock for an investor is being paid last if the company goes bankrupt. This could mean a common stockholder could receive no payout after the preferred stockholders and creditors are paid. 
Bonds offer stability, but the downside to bonds is the lower returns in the long-run versus investing in stocks. A bond’s price may also drop if inflation rises. Bond issuers can also call a bond early, thereby eliminating future dividend payments. 
Investment Choice
As one can see, common stock, preferred stock, and bonds all have their advantages and disadvantages. Investors are likely to invest in bonds rather than common stock even though common stock can have a higher return. Bonds are considered a safer investment than common stock since bonds have a fixed coupon rate. Investors who purchase municipal or federal bonds can benefit from zero state, local, and federal taxes in some cases. However, one of the main reasons an investor would choose bonds over common stock is protection if the company files for bankruptcy. 
Raising Funds
When a company needs to raise funds, management may consider debt financing or offering common or preferred stock. All options have pros and cons for the company. For instance, financing debt could be a way for a business not to give up any ownership, such as what happens when selling common or preferred stocks. Financing debt also offers tax deductions, low-interest rates, and the ability to establish and build credit. The downside to financing debt, however, is having to pay back the loan with interest even if the company goes bankrupt. 
Equity financing, or selling common and preferred stock, can be an option when raising funds. The benefits to the company from equity financing include no repayment obligation, as the dividend payouts are incorporated into the business’ performance. The company will not have an impact on their credit and funds are raised from the investors. However, the disadvantages of equity financing include losing some ownership rights to the company. Common stock shareholders will also have voting rights and have the potential to influence future business decisions. 
Many companies will offer preferred stock rather than common stock due to not being successful enough to attract numerous investors. In addition, the company will not lose any voting rights to shareholders by offering preferred shares. 
Evaluation of Investment Alternatives
When determining which investment method to utilize, companies and investors each have a different approach. For investors, it can depend on how much risk they are willing to take when deciding to purchase common stock, preferred stock, or even bonds. Investors will consider the dividend payouts, and the current market, and even decide if they want an ownership stake in the company. However, companies consider which method is best to raise the capital they need, whether it is through equity financing or debt financing. The company will have to determine if they can repay the debt or if they are willing to give up ownership and voting rights. 
Capital Budgeting Methods
There is no single method of capital budgeting; in fact, companies may find it helpful to prepare a single capital budget using a variety of methods (Pinkasovitch, 2023). Examining the capital budget methods of discounted cash flow, payback analysis, and throughput analysis, the most commonly used approach is the discounted cash flow. This method takes into consideration that a dollar today is worth more than a dollar tomorrow. Discounted cash flow also depicts the inflow and outflows of a project. I would also conduct an NPV analysis on potential projects to determine which, if any, of the projects should be considered. 
References    
Corporate Finance Institute Team. (n.d.). Common vs. preferred shares. Corporate Finance Institute. Retrieved April 30, 2024, from https://corporatefinanceinstitute.com/resources/equities/common-vs-preferred-shares/#:~:text=Usually%2C%20bondholders%20are%20paid%20out,but%20before%20the%20common%20stockholders.
Pinkasovitch, A. (2023, October 30). Capital Budgeting: what is is and how it works. Investopedia. Retrieved April 30, 2024, from https://www.investopedia.com/articles/financial-theory/11/corporate-project-valuation-methods.asp#:~:text=Capital%20budgeting%20is%20the%20process,net%20present%20value%20(NPV).

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