Question

Explain and provide examples in your own words why a company may choose to raise capital by issuing bonds instead of issuing stock.

Answer 1

Raising money by issuing bonds is one of the option which company can opt. Issuing bonds is favaourable is some of the below mentioned circumstances, these can also be taken as examples:

1 If Company issues stock, it will increase their share capital means increasing the ownership of company and In bonds case there is no increase in share capital and ownership.

2 More persons become owner of the co. if stock is issued which will distribute the earnings of the co. in more persons in comparison of previous one which means less earnings are attributable to shareholders now. This can be avoided by issuing bonds.

3 Issuing stock will decrease the Earning Per Share (EPS) of the company, If co. doesn't want to show reduced EPS it can opt to raise money by issuing bonds.

4 If co. wants to raise money for a short term period, it is beneficial to raise by issuing bonds for short term maturity because issuing stock means giving ownership which is for long term purpose.