Will rate highly! Please only original sources/answers. 1. Why bonds?, bond issu

Question

Will rate highly! Please only original sources/answers.

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

Answer -

1. Bonds - Bonds are basically debt obligations which company issues. They have to be treated as loan and the company needs to pay in future. Also, interest is paid to the bond holders.

Basically the corporates follow 2 types of financing - Equity financing and Debt financing. Both have its own pros and cons.

FINANCIAL LEVERAGE -

Basically, financial leverage means the ability of a firm to use its interest payments to magnify its operating profits. In simple words, the company uses borrowed capital for an investment, expecting the profits made to be greater than the interest payable. As mentioned above, when a company uses debt financing, it has to pay only a fixed interest even if it earns more profits. Thus, company can keep those profits for itself and use for its growth.

Hence, financial leverage occurs when a company has debt content in its capital structure and fixed financial charges i.e. interest on debentures, bonds, etc.

Conclusion - More amount of loans may put company to a risk because irrespective of profit or loss the company has to pay interest in case of debt financing. If the company faces losses, the interest payment may become a burden for it. so, an ideal financing option for a company is to have both debt and equity financing in its capital structure so that the company can enjoy the benefits of both the types.

2.Below are the following differences between bonds and loans

DEBT FINANCING EQUITY FINANCING 1 Here, the company raises money from public by issuing loans and debentures. Here, the company raises money from public by issuing equity and preference shares 2 Here, the company pays interest Here, the company pays dicidend to the share holders Pros Pros 1 The bond holders do not become the owner of the company. They are just like creditors When there are losses, company need not pay to the share holders 2 Even when there are huge profits, the company only needs to pay a fixed interest and can keep the balance with the company otself The company need not repay the shareholders till the time of liquidation. Thus, they need not worry about repayment of money. 3 The company can keep the creditors out of the business and can independently take decisions Cons Cons 1 The company needs to pay the bond holders even when there are losses The shareholders become the owners of the company and they have right to vote 2 Bonds are only for fixed period and hence the company should be repaying the debt amount else will go into liquidation They participate in the decision making of the company

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

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