Question

In: Accounting

Explain the pros and cons of issuing new stock, reissuing treasury stock (if applicable), and issuing...

Explain the pros and cons of issuing new stock, reissuing treasury stock (if applicable), and issuing convertible bonds. In addition, include your recommendations on how a company could generate cash from issuing new common stock, preferred stock, convertible bonds or reissuing treasury stock.

Solutions

Expert Solution

Issuing Common stock

Pros

1. No fixed liability to pay dividends . That means if income is low or loss is generated no fixed liability to pay dividends.

2. No refund of money . Unlike most of the ways of fund raising this way do not require to repayment . Safety in case of bankruptcy .

Cons

1. No tax benefit for dividend paid is available . Dividends are not consider as expenses.

2. It may dilute ownership .

3. It may require more legal formalities .

4. Equity financing is expensive than issue of bonds

Reissue of treasury stock

Pros

1. No fixed liability to pay dividends . That means is income is low or loss is generated no fixed liability to pay dividends.

2. No refund of money . Unlike most of the ways of fund raising this way do not require to repayment .

3. It will not require more legal formalities .

4. Safty in case of bankruptcy .

Cons

1. No tax benefit for dividend paid is available . It is not considered as business expense.

2. It may dilute ownership .

Issuing convertable bonds

Pros

1 Interest paid are tax deductable . It is considered as business expense.

2 In case of new company public do not want to purchase common stock this helps to attract them as initially it carry fixed interest and repayment charecteristics and than could be converted in to common stock after looking companies performance .

3 . It do not dilute ownership .

4 Debt financing is less costly than equity .

cons

1. The interest payble is a fixed liability .

2.The repayment issue may arise .

3. Risky in case of bankruptcy .

Recommendation on generating cash .

1. If company does not wants to create a fixed liability of interest or dividends and repayment liabilities company musk issue common shares . More over if risk of dilution of ownership not exists this option may be opted .

2. If company wants instant money it can reissue treasury stock rest pros and cons are similar to common stock .

3 If company initially wants less expensive funds and no dilution of ownership company may issue convertable bonds . These are also helpful for new companies which cannot easily place their common share .

DO UPVOTE IT SHALL BE A GREAT FAVOR THANKS


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