Question

41.

Small companies typically prefer ____________ to borrowing from a bank because it is a source of funding where the company is not obligated to _____________________.

A)

issuing bonds; to proceed with an IPO

B)

an IPO; issue bonds

C)

an IPO; make interest payments

D)

issuing bonds; make interest payments

Answer 1

41. Answer Option (C) Small companies typically prefer an IPO to borrowing from a bank because it is a source of funding where the company is not obligated to make interest payment

Explanation  

During the initial days, a small company faces the challenges like limited resources, limited market and fixed overhead cost and limited investment by the founders, with this challenges it find it very difficult to grow. With all its effort it might incurring marginal profit or might have crossed the break even output. In the growth stage the small company needs huge investment to grow. For growth more fresh investment are required by the small company. So as per option provided in the question, small company can raise the money.

1. Small company may raise money by issuing IPO
2. Small company may borrow money from banks

Out of these two options the money raised by issuing IPO is the best option because here the small company is not liable to pay the entire amount to the shareholder. Based on the performance of the company, the small company may issue dividend.

Whereas money raised by borrowing from banks is not preferred, because the small company have to pay fixed amount of inertest to the bank during specified time periods, as per the agreement.   Which many leads to decrease of cash for the small company.