Question

One of the three sources of capitol a firm has is offering new equity (stock) to the public. Unlike debt, companies do not have to repay the money raise. So why would a company borrow money instead issuing new stock?

Answer 1

Issuing stock of the company means that there are a few shareholders having the right to know about the functioning of the company. Also, when we make the company public, the dividends of profit have to be shared with the shareholders and more likely owners prefer to debt finance than issue new stocks of the company to the public. Few reasons for the same are:

1. Debt financing is cheaper in the long run especially when you make plans of scaling or exiting the operations of the company.

2. Debt can avail the company owners few tax benefits which will they will not be receiving through equity shares. The loss and profit statements will reduce the taxable income when you debt finance your company.

3. With many shareholders, the owners will be forced to take the opinion of every shareholder before taking a decision on the functioning of the company. Hence through debt financing the owners need not worry about the opinion of the shareholders.