Question

Discuss the advantages and disadvantages of the following types of financing:

1. Issuing bonds
2. Borrowing from the bank
3. Equity financing

Provide an example of how a public company has relied more on one method of financing than the others and why it has done so.

Answer 1

Answer:-

Issuing Bonds:

Advantages of issuing bonds :

• Fixed payment of interest and know in advance the actual liability to be paid.
• Low cost of issuance of bond.
• Low cost  of debit in issuance of bond.
• Less complications in issuance of bonds.

  Disadvantages of issuing bonds:

• Very much less liquidity.
• It is a burden to a company that  interest will be paid irrespective of whether company has earned profit or not.
• Undue influence of lender in the functioning of the organisation.
• Number of legal formalities to be completed.

Borrowing from the bank-

Advantages of borrowing from the bank:

• Less legal complications in relation to arranging a loan in comparison of issuance of bonds.
• Less time required for sanctioning of loans.
• Easy and pre closure of loans.

Disadvantages of borrowing from the bank:

• The processing fee is too high.
• Review and verifying credit analysis.
• A number of legal processes required for sanctioning of the loan.
• Time taken more while sanctioning.

Equity financing:

Advantages of equity financing:

• No compulsion to pay dividend. Ina owners capital.
• Amount would be refunded in case of binding up of company.
• No burden of fixed payment of liabilities.

Disadvantages of equity financing:

• High risk is involved in equity issue.
• High rate of cost of equity capital.
• High cost is involved.
• Uncertainty in payment of dividend.