Question

You are in need of funds to expand your corporation, and three alternatives include issuing common stock, issuing bonds payable, and issuing a note payable. Discuss the pros and cons of each of these three choices.

Answer 1

NOTE: According to company financial ability by checking advantages and disadvantages select which method is useful for the issue of additional capital.

COMMON STOCK;

Common stock is the ordinary stock issued by the company which forms a share in the owner ship in the company

Pros

Issuing a common stock is an alternative for the issuing a debt or preferred stocks

This policy is adopted when company is not interested to add to more debt in the balance sheet

And common stock does not have any binding like payment of dividend in a fixed rate whereas common stock can get an EPS based on company profitability

Corns

Issuing a common stock dilutes ownership in a company

And increases number of outstanding shares in the market or balance sheet

BONDS PAYBLE:

Bond payable is a traditional debt instrument

Where investor lends money to business which hold certain interest or dividend need to pay by the company

Procs

When business need cash for the taking new capital or new scope of business they use this debt instruments without diluting its ownership in the company, holders of debt instrument will not be part of decision making

Interest paid to the debt instrument will be considered as an expense to the company can used for tax deductions

Company can borrow money when it is required and with low interest rates than return on investments

Corns

There are certain regulations they’re to issuance of bonds as much as company wants

Interest on must be paid monthly irrespective of company performance etc

Bonds liability must be paid upon expiry of the bond terms irrespective of the company financial status

NOTES PAYABLE:

Notes payable is also called a promissory note
it’s a pledge to repay money
that document contain amount borrowed and interest they’re on

Pros

Its fits better with company financial situation and repayment can be designed according to the financial strengths

Generally repaid more than a year of issuing date
It don’t need approval from share holders

Corns

Its not useful for large company
using this approach company can get small and short-term needs
where it holds lot of legal binding to the company for timely repayment along with interest