Question

How would a CFO decide if company should raise finance from Bond, OR Equity, OR Preferred Stock? Evaluate it by giving detailed features, merits and demerits of the each of them.

Answer 1

Answer: A capital structure decision is crucial in the company. Ratio of equity, debt and preferred stock is the decision taken by CFO in the company that requires detailed analysis.

We can see the merits and demerits of each of them here-

Bond- It is a debt instrument and provide interest to the bondholders. Bondholder is a creditor of the company, company repays the loan of bondholder after a certain period of time.

Pros- It is easier and less expensive to issue the bonds rather than issuing shares.

Cons- Company has to pay interest on the bonds and repaying the loan of bondholder is a liability for company.

Equity- It is company's share capital, it represents the ownership in the company.

Pros- Equity share capital is not the liability for company, common share holders are the owners of the company and they have voting rights too.

Cons- At the time of liquidation, equity shareholders are given last preference in repaying their capital.

Preferred stock- Preferred stock as the name suggests, given preference in paying dividend and repayment of capital.

Pros- Preferred shareholders get preference in getting dividend and repayment of capital at the time of liquidation.

Cons- They have no voting rights in the company as common shareholders do.