In: Accounting
Assume you are the CEO of a large farm equipment manufacturer. You need additional funds to finance your operations. You must decide whether to finance your operations with debt, the issuance of common stock or by reinvesting the profits generated by the business. Please indicate how you are going to finance the operations and support your decision. You can only choose one.
Debt :
1. No participation in profits
2. Fixed commitment to pay interest and principle requirements
3. Cost of debt is comparatively less than cost of equity (Common stock)
4. Since risk is low cost is also low
5. No Dilution of ownership
Common Stock :
1. Common stock - too many compliances like prospectus, underwriting etc
2. No fixed payment commitment
3.Since risk involved is high, cost will also be high
4. Dilution of ownership
Profits generated by business: (Last but not least )
1. Acutal cost is zero
2. Growing companies always invest their profits without distributing them as dividends and increase the wealth of the stock holders.
3. Risk is very low.
4. No Commitment to repay
5.Insignificant legal compliances
6. No Dilution of ownership
7. Avoiding debt
8. Investors shows more interest to reinvest rather than dividends if company is growing
Based on above three its better to choose third option