Question

Suppose that an internet-based program, Novus, wants to raise $10 million to expand its business operations. Describe how Novus can raise these funds directly through each of the follow options: issuing stock, issuing bonds, or obtaining a bank loan. Compare and contrast these three options.

Answer 1

The three investment options available to any company is :

• issuing stocks
• issuing bonds
• bank loan

All the three financing options help a company to raise funds when they require for expansion, financing a project or a program.

Issuing stocks: Stocks is also seen as an alternative to raising money. Dividends are paid on the stock which is not tax deductible. Cash dividends are optional payments to shareholders. Issuing stocks help the business to conserve it's cash and paying the interest plus repayment of face value to bond holders drains the cash in the company. Issuing stocks, also mean giving a part of the ownership of the company.

Issuing bonds: Issuing bonds is seen as a better alternative to obtaining loans from the bank , as selling debt is tax advantageous as the interest paid in debt is tax deductible on the issuing entity's income tax returns. It reduces the amount of taxes the company pays. Issuing binds, eliminate the middle man , as such it makes the entire process of raising money, cheap and efficient.

Securing a bank loan: The costs involved in borrowing from bank is expensive and sometimes restricted. That is, on average the bond yield is lower than the bank interest rate for the lowest-risk borrowers so companies generally prefer raising money by selling bonds to the public.