Is stock better than debt as a source of financing? Why or why not? Rationalize your...

Is stock better than debt as a source of financing? Why or why not? Rationalize your position.

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Expert Solution

Stock is not better than debt as a source of financing due to the following reasons:

1) Stocks (sale to outsiders) leads to dilution of control.

2) Cost of issuing equity is generally the highest due to a variety of other costs associated with it ( Underwriting commission), brokerage costs etc.)

3) Debt holders do not particiapte in the value created by the company as the payments are restricted to interest & principal.

4) Maturity of debt can be tailored to synchronise with the period for which the company needs funds.

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