Question

One of your clients, John Browne, is considering different ways to raise money for the expansion of his company’s operations. John is not sure about the advantages of issuing bonds versus issuing common stock. He asks you to explain, in simple terms, the answer to his question.

Required: Post a response as though you are responding to John's question. Include in your post an explanation of:

(1) the advantages and disadvantages of issuing bonds

(2) the advantages and disadvantages of issuing common stock.

(3) the basic differences between preferred stock and common stock.

Answer 1

Answer-

Advantages of issuing bonds-

1.It reduces the amount of taxes.

2.Their are considered as a safer investments as comparatively to stocks.

3.The volatility is less in day-to-day basis.

4.The interest on bonds are generally high.

Disadvantages of issuing bonds-

1.It is risky investment such as-credit risk,exchange rate risk,inflation risk etc.

2.They need to repaid on a montly basis till its maturity in this the bond issuer has to pay back the amount borrowed.

3.The investor has to pay the interest regardless of the financial situation of the company.

Advantages of issuing common stock-

1.It conserve the cash.

2.It is helpful in paying down debt, using common stock a company can pay down it's high debt load.

3.It is helpful in raising the money,the investment used in different ways is useful in growing business.

Disadvantages of issuing common stock-

1.By selling the shares in the market,a company is increasing the number of outstanding shares.That's why company usually avoid issuing common stock.

2.It may sometimes lead to bankrupty as when company becomes financially distressed it enters bankrupty.

The basic differences between preferred stock and common are:-

1.Preferred stock pays a predetermined dividend whearas in common stock dividends paid to shareholders vary accordingly.

2.Preferred stock has higher dividends whearas common stocks are less volatile and carries less risk too.

3.Preferred stock is a guaranteed dividend and considered as a fixed-income investment whearas in common stock the company's board of directors will decide to pay out a dividend.

Good luck?