Question

Facebook's management is considering purchasing a competitor for a substantial amount of money. The CFO and Treasurer are looking at various options for financing the purchase. Which of the following are reasons they might prefer using bonds (debt) to finance the acquisition Vs. the issuance of new stock (equity)?

A the cost of borrowing debt is generally cheaper than equity due to the lower yield required by investors and the fact that interest expense is generally a deductible expense in determining corporate taxable income, while dividends on stock (equity) are not deductible for tax purposes.

B financing with bonds (debt) is less risky for the company

C the various legal and banking fees associated with financing bonds (debt) are generally less than financing with equity (i.e., fees and expenses of issuing more common stock).

D	both a) and c)

E	none of the above

Answer 1

D. is correct,

Required rate on bond is lower than on equity as bond have preference over equity in case of default. There is also tax shield on interest.

Raising money through equity, the fees are higher