Page 584 Principles of Finance. What would the best option be? Ethical Dilema, A
ID: 2787176 • Letter: P
Question
Page 584 Principles of Finance. What would the best option be? Ethical Dilema, A bond is a bond is a bond. A company wants to expand and recently issued 30 yers bonds with low couopon rates. Company rating are AAA , but investors are willing to purchace. However they are considering raising additional funds by issueing new debt to use for additional expantion.
New security that is both debt and equity which has been recently introduced to the US, even though other countries have used them, is being considered wih are bondocks. Compared to conventional debt, bondocks may increased EPS significally. as it is much lower than equity. Plan to issue bondocks with after tax cost of 5%. The bondocks maturiteis are 50-60 yrs,
Should a company go this route?
Explanation / Answer
Yes, the company can issue bonds for expansion because the cost of capital in issuing bonds is much lesser than raising equity where cost of capital can be >12%. As it has AAA rating so it is bonds can be issued at much lower cost of capital as there is default risk .Moreover if they issue stocks then they have to dilute their ownership but in issuing bonds they dont dilute their ownership. Moreover as bond is debt capital so it can provide leverage to firm magnifying shareholder's wealth. So, bonds issue should be a wise option.
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