*****Will rate highly!!!!!***** 1. Why bonds?, bond issuance (bond offering) ver

Question

*****Will rate highly!!!!!*****

1. Why bonds?, bond issuance (bond offering) versus stock issuance from a corporate perspective in terms of capital need. In other words, what are some of pros and cons of this two pathways of corporate financing options? One, through "Debt Financing" (long term liability section in financial reporting, ch.14) as opposed "Equity Financing" (ch.13 paid-in-capital of equity section of financial reporting)? Please also think about the related concept of "Financial Leverage". Please discuss ups/downs (pros and cons) between the two capital raising/structure.

2. Now everything said and done with bonds, what is then difference between bonds and loans(bonds vs. loans as long-term debt)? Please discuss as many difference as you think of, from a corporation perspective as well as from an investor/lender perspective.

Explanation / Answer

Point 1: See as far as bond particularly is concerned , it is a type of security issued by a company to have some finance in return of some percentage of interest to the bond purchaser or holder and this comes under " debt financing". So i shall give the comparison of debt financing and equity financing from the company's point of view below:

Debt financing:

Equity financing :

This was the basic comparison of the two capital structures.

Financial leverage : This term stands for the capacity of a company to use its securitites basically debt financing securities or preferrence securities. It means the form uses the outside money more and more and just goes on with a small payment of interests as compared to putting in the whole money itself. The more it uses the outside money , higher is its financial leverage.
But it has a risk in case of excess leverage, that, it increases the interest payments and thus the share holders get a decreased earning per share as the final profits decrease after the interest payments and the shareholders get a lesser dividend and thus they turn unhappy and the firm's financial image loses. So it has to be a balance of leverage and earning per share.

POINT 2:

Bonds are the instruments used by companies and loans are an agreement between generally banks and its customers.
Bonds are more tradeable than loans because don't prefer taking "loans" as a technical term used in the subject.
Loans if we talk about in terms of invester perspective, then:
Its really uncertain when partically a word of mouth is the only agreement between the two parties.
If two small businesses are involved in taking loans from each other, they may have a document involved called agreement and which contains the percentage of money to be received as interest by the lender and the time period in which it has to be paid without fail, else its enforceable to the Law as stated in the agreement.
Also in some cases, a security is kept by the lender in terms of a valuable good which values more than the loan amount and in case of failure of re-paying the principal amount the lender sells the good of the needy and realises his money.

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.