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

1. Common stock:

Pros :

(I) Bet suitable when the economic conditions are bullish

(ii) The company does not have any fixed obligations to pay dividends

(iii) Huge monies can be raised through this mode

Cons:

(I) Dilution of ownership

(ii) Pressure to perform well to ensure return on investment

2. Bonds payable:

Pros:

(I) Suitable when the market conditions are bearish

(ii) No dilution of ownership

(iii) Interest paid is tax deductible

Cons:

(I) Fixed obligation of interest payment even if the company does not make profits

(ii) May include fixed charge on assets and does not permit free usage

3. Notes payable

Pros:

(I) The length of the note can be adjusted as per the company's requirement

(ii) Interest is deductible for tax purposes

(iii) Is more flexible than more modes

Cons:

(I) Has a fixed interest payment obligation

(ii) Usually a collateral is attached with the note

The best choice while expansion will be to issue common stock if the economic conditions are favorable. Since during expansion the company may have difficulty in paying fixed obligations and also require huge monies.