Par Value

Definition

Par value is the nominal or face value of a security stated by the issuer. It is crucial in the context of stock issuance, where it represents the minimum price at which shares can be sold. Additionally, in cases of stock dividends and splits, par value plays a role in determining how shares are adjusted and valued during these corporate actions.

5 Must Know Facts For Your Next Test

1. Par value is often set at a very low amount, such as $0.01 or $1 per share, to avoid legal liabilities for companies.
2. When a company issues stock, it cannot sell shares below their par value, although shares may trade at higher market values afterward.
3. In stock dividends, the total par value of outstanding shares increases as additional shares are distributed to shareholders based on their existing holdings.
4. Stock splits decrease the par value of each share while increasing the total number of shares, keeping the overall equity unchanged.
5. For accounting purposes, par value is primarily used to calculate the common stock account on the balance sheet, reflecting the legal capital of the company.

Review Questions

• How does par value impact the issuance of stock and what legal considerations are involved?
  • Par value directly influences how a company can issue stock since shares cannot be sold for less than this stated minimum. This legal requirement ensures that companies maintain a level of capital protection. For instance, if a company sets a par value at $1 per share, it cannot issue those shares for less than that amount, protecting creditors' interests by ensuring that the company maintains its capital structure.
• In what ways does par value affect accounting entries during stock dividends and stock splits?
  • During stock dividends, the company increases its total number of shares, resulting in an increase in the common stock account based on the par value of newly issued shares. For example, if a company declares a 10% stock dividend and has 1,000 shares with a par value of $1 each, it would add $100 to its common stock account. In contrast, during a stock split, while the number of shares increases and par value decreases proportionally, the total equity remains unchanged. The accounting entries reflect these changes by adjusting both share count and par values accordingly.
• Evaluate how variations in par value might influence investor perceptions and company valuations during corporate actions like dividends and splits.
  • Variations in par value can significantly influence investor perceptions regarding a company's financial health and governance practices. A low or no par value might signal flexibility in corporate financing strategies but could also raise concerns about adequate capital retention. Conversely, substantial changes in par value during corporate actions like dividends or splits may lead investors to reassess their valuations based on perceived growth potential or risks associated with dilution. Understanding how par values change allows investors to better interpret their investment’s worth in relation to market conditions and corporate strategy.

Related terms

Market Value: The current price at which a security is trading in the market, which can differ significantly from its par value.

Preferred Stock: A type of equity security that typically has a fixed par value and priority over common stock in the payment of dividends and during liquidation.

Stock Split: A corporate action that increases the number of shares outstanding while reducing the par value per share, without affecting the overall equity value.