Question

Discuss the relative costs and benefits or raising new capital through a bond issue and through a stock issue. What issues should the firm consider when deciding how to raise new capital?

(Please make it as lengthy as possible)

Answer 1

When a firm raises new capital through the issue of a bond, the issue of new capital through bond is cheaper in comparison to stock. The issue of capital through stock is expensive and not a preferred method of raising new capital. Only if the company has issued enough debt, that it will raise additional capital through the issue of stock. The company will not have to give naything in return when raising capital through equity but debt has to be repaid timely otherwise it can oush the business into bankruptcy.

If the firm has too much debt in the capital structure, it might not riase additinal capital through debt. So, it has to raise capital through expensive methods like new stock issue. When a business raises new common stock, then the additional shareholders will demand a share in the profits of the business and it will also lead to thee quity dilution. The company also has to meet the expectations of the shareholders by maintaining attractive share valuations.