Question

You are a 5% shareholder in Company XYZ, Inc. The company is planning to expand operations and is seeking sufficient funding to support this expansion project. The company is deciding between issuing bonds or issuing new shares of common stock to obtain the desired funding. Discuss the advantages of each and the disadvantages of each from your perspective as a shareholder. Include the impact to the accounting equation (assets, liabilities and shareholders’ equity), address such risks as increased debt, cash flows needed for interest, repayment of debt, increased number of shares outstanding, and impact to EPS (to name a few risks).

Answer 1

Given , a compnay is planning to expand its operations and is seeking sufficient fund to support the wxpansion. The company has two options 1) Bonds 2) Issue of common stock.

Advantages and Disadvantages to the Shareholders when company issues Bonds:

Advantages:

1) When the bonds are isued, the amount paid to the bonds is less when compared to the shares issued. Thus leaving more amount in retained earnings for the share holders to be shared.

2)The interest on bonds is allowed as a deduction for tax purpose which leaves more after tax profits which is to be distributed to share holders.

Disadvantages:

1) Bonds are paid prior to the Shareholders. So, in the time of liquidation bonds gets priority while the shareholders are not remained with any distributions.

Advantages and Disadvantages to the Shareholders when company issues Common Stock:

Advatages:

1)As the bonds will not be there the shareholders gets the priority in liquidation.

2) After liquidation amount left is more to distribute to shareholders.

Disdvantages:

1) Earnings per share is decreased with the additional issue of common stock.

2) Ownership stake is diluted

3)Voting influences diminishes

Impact to the Accounting Equation:

Option	Assets	=	Libilities	+	Shareholders equity
Bonds	Cash increases	=	Increased debt and interest liability	+
Common Stock	Cash increases	=		+	Number of share holders increases , Earnings per share is reduced