Bongo Company's board of trustees knows the company needs to raise some serious cash to finance...

Bongo Company's board of trustees knows the company needs to raise some serious cash to finance expansion. They are considering three options to raise the needed cash. They can issue bonds, issue common sock or issue preferred stock. Compare and contrast the advantages and disadvantages of each of these approaches to financing. Which one would you suggest Bongo use to raise the funds and why?

Expert Solution

The three options that the company is considering to raise money are:

1) Issue of bonds: The main advantage of issuing bond is that the company can get tax benefits on the interest paid to the bondholders. The disadvantage is that the company will have to incur a constant expenditure in the form of interest payment to the bondholder.

2) Issue of common stock: The advantage of issuing common stock is that the company will be able to raise money from the public and the stock market easily. The disadvantage is that the stockholders will have to be paid dividend when the company earns profits.

3) Issue of preferred stock: The issuing of preferred stock has more disadvantages than advantages. The disadvantage is that the voting rights of the company will be in the hands of the preferred stockholder as well.

From the above information, it is clear that issuing common stock is the best option to raise money.

jeff jeffy answered 2 months ago

The Bicol Express food company needs to raise money to finance sales which are growing rapidly....

The Bicol Express food company needs to raise money to finance sales which are growing rapidly. The company is deciding whether to issue corporate bonds, common stocks, or preferred stocks to accomplish this purpose. Answer the following questions; What should the company consider before making this choice? What are the advantages and disadvantages of each of the three options?

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different 25-year bonds to raise these funds: a coupon bond with an annual coupon rate of 7 percent; and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000, and a required annual return of 7 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $46...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a required annual return of 8 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $44...

LG Ltd needs to raise $500,000 to finance the acquisition of a new tour bus. It...

LG Ltd needs to raise $500,000 to finance the acquisition of a new tour bus. It approached an investment bank that proposed the following alternatives: The issue of 8%, cumulative preference shares for $500,000 with a fixed redemption date 5 year from the date of issue; or The issue of 10%, non-cumulative, preference shares of $500,000, redeemable at the option of the issuer The preference share issue is planned for 2019. The accountant prepared an abridged projected statement of financial...

Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to...

Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 20-year zero coupon bonds to raise the money. The required return on the bonds will be 8 percent. Assume a par value of $1,000 and semiannual compounding. a. What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Issue price $ b. Using the IRS amortization rule, what interest deduction...

The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The...

The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the the offer price is $35 per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?

Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided...

Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 8 percent. Assume semiannual compounding periods. a. What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Using the IRS amortization rule, what interest deduction...

Edison Corporation needs to raise funds to finance a plant expansion and has decided to issue...

Edison Corporation needs to raise funds to finance a plant expansion and has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 8 percent. Assume a par value of $1,000 and semiannual compounding. a. What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Using the IRS amortization rule, what interest deduction can the company take...

Mahomes Company needs to raise $275 million to start a new project and will raise the...

Mahomes Company needs to raise $275 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost...

Cully Company needs to raise $23 million to start a new project and will raise the...

Cully Company needs to raise $23 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 8 percent, for new preferred stock, 6 percent, and for new debt, 4 percent. What is the true initial cost...

Question