Question

Using your chosen company and the current conditions in the financial markets, assume the firm needs to raise a large amount of cash. Compare the choices of raising these funds in the capital market (selling new shares of stock) versus the bond market (debt financing), and make a decision as to what is best and why. Also, consider ethical implications of financial reporting and how it relates to acquiring additional investors and accessing markets for additional capital.

Answer 1

Let’s take the example of APPLE

Because of the global pandemic the financial market has been going through a lot of turbulence and equity market has not been performing well and it is probably expected to not do well for sometime in coming few months. Here the company can raise money either by issuing stocks or by issuing debt, the market is not doing well so if you are going to raise money by equity you would probably not be able to raise a large amount and that even the cost would be high because the overall equity market is not doing well. However, people are looking for fixed income sources in order to reduce the volatility in the portfolio so the company can raise capital by issuing bond (Which APPLE has done and many companies has done also). The benefit of using debt would be because of high creditworthiness of APPLE in the market it can issue bonds at cheap rate comparative to other company and take benefit of the lower interest rate. So, debt financing in the current economic environment would be a better option. The reporting of bond would be done similar to other debt instruments and it would be treated as debt, on the balance sheet. The annual coupon has to be paid to the bondholder and that would be treated as expense on the income statement.