From the investor’s point of view, analyze the advantages and disadvantages of the
three investment alternativescommon stock, bonds, and preferred stock. Why
would an investor select an investment in bonds over common stock, even if the
return on the common stock investment is higher?
From the firm’s perspective, evaluate the pros and cons of using different
combinations of debt, common stock, and preferred stock to raise funds. Why do
some firms use preferred stock and others do not? Is it a matter of subjective
preference, or are there sound theoretical reasons for the use of specific sources of
funding?How does an investor’s evaluation of the investment alternatives differ from the
evaluation by a company trying to raise funds?
Among all the capital budgeting methodologies and their respective rules, which
would you use and why? What are the advantages of one rule over another? Does
the size or the nature of an investment have any impact on which method should
be used? Why or why not? How might a rule be improved to make it more
effective?
