# Cash flows in preferred and common stock

What are the cash flows associated with calculating the present value of preferred stock? What are the cash flows associated with calculating the present value of common stock? Why is it more difficult?

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The response address the queries posted in 981 words with references.

//Before writing about the cash flows associated with preferred stock and common stock, we will write about the concept of ' Present Value' and 'Net Present Value' (NPV). Then, we will write about the basic components of cash flows incurring in a Company. We will also discuss about the cash flows associated with calculating the present value of preferred stock. //

Cash flows in preferred and common stocks

Introduction

The concept of present value lies in the fact that the value of money we are investing today will diminish as the time passes. All of us would prefer receiving $1000 today than to get $1000 after five years because we have an option to invest that $1000 in such a way that it becomes more than $1000 in the time span of five years (Understanding cash flows, 2007).

The net present value (NPV) of a preferred or a common stock is the sum total of the present value of the cash flows; positive, as well as negative, that are expected to occur over the life of the stocks held (Chandra, 2001). The NPV can also be understood as the current value of a future amount of money or a series of payments evaluated at a given interest rate (Van Horne, Wachowicz Jr, & Bhaduri, 2008). This process of calculation of NPV is also known as the process of discounting.

Basically, there are three basic components of cash flows incurring to a company. They are:

? The Initial Investment: - It is the initial cash proceeds, which are a result of the activities undertaken.

? Operating Cash ...

#### Solution Summary

The response address the queries posted in 981 words with references.