Question

You are in need of funds to expand your corporation, and three alternatives include issuing common stock, issuing bonds payable, and issuing a note payable. Discuss the pros and cons of each of these three choices. Determine the best choice for your corporation and explain why.

Answer 1

Issuing common Stock

Advantages

1. Cash is saved because there is no periodical outflow of interest.

2. Paying dividends is not mandatory.

Disadvantages

1. Strict regulatory compliance.

2. Dilution of ownership in the company.

3. Numerous restrictions.

Bonds

Advantages

1. Fewer restrictions.

2. No dilution of ownership.

3. Best for long term borrowing.

Disadvantages

1. We have to pay interest which periodically and it is mandatory.

2. Pressure on the credit rating of the company because of a possible default.

Note payable

Advantages

1. Very few restrictions.

2. No dilution of ownership.

3. Best for short term borrowing

Disadvantages

1. Company has to pay the interest regularly.

2. Long term needs cannot be fulfilled.

Issuing common stock is best for corporate because:-

1. External liabilities are not reflected in the company's balance sheet.

2. Economical source of finance.

3. No obligation to pay interest.

4. The brand value of the company is improved because of presence among retail investors.

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