Question

Explain why a company may decide to use corporate bonds instead of stocks to get funds for an expansion project

Answer 1

Company may use the corporate Bond instead of stock to get fund for an expansion project because-

A. Corporate bonds are having the advantage of tax deduction on interest payment which will considerable lower the overall cost of capital of the company

B. Equity share holders are not happy with fresh issue of Equity stocks and they may lower down the prices of the company in the market because they feel like the company is losing the control by issuance of equity shares so company will be going for issuance of debt capital

C. Debt capital will also mean that the company will be having an adequate control over its operation and if the rate of return on the expansion project is higher than the cost of capital then it would be leading to a growth opportunity

D. Those company who are into their growth stages and expansion stages are also having an easy access to the debt market because they have better generation abilities and hence they are easily paying out the debt capital

E. debt instrument will also mean that these corporate bonds are going to provide the company with no interference in the project because expansion project are always interfered with the equity shareholders

F. stock issuance will also mean that the company will have higher amount of flotation cost which will be saved in case of debt securities

Hence, the company should be going for issuance of Corporate bonds if it feels like it will have an adequate advantage in making higher rate of return which will easily beat the cost of debt.