Question

Bonds are a liability (debt) for a company, stock is equity and therefore, a form of capital. Using the information and terminology in this module and research you complete on your own, determine the pros and cons for a company for issuing bonds and stocks. Assess the following components:

• Advantages
• Disadvantages
• Potential for Earnings
• Risk
• Access to funds
• Tax implications

Answer 1

Bonds are debt instrument that pays coupon or interest to the investor and it is issued for number of years and the company has to pay back the principal amount at a later date called maturity date.Interest can be paid annually , semi annually , quarterly, monthly and so on.The more it is compounded the more is the interest paid.

Stocks or share is the share in the share capital of the company.It gives the ownership status to the shareholder.Just like interest the shareholders are paid dividend, but it is not mandatory to pay the dividend to the shareholders.Dividend decision is usually taken at the general meetings of the company.There are two types of share 1 is ordinary share or equity share 2.Preference share.Of late preference share is getting extincted.

Ordinary Share gives voting rights to the shareholders.Equity shares are traded on the stock exchange.In the event of liquidation of the company the company need not pay these shareholders.

Preference shares are shares which do not get voting rights. In the event of liquidation these are paid out first after the creditors are given their money.

Advantages

1) The interest paid to the bond holders is tax deductible and can be filed by the company on filing IT returns.SO the company enjoys that much amount of money on interest paid.Cost of borrowing is reduced

2)The interest rate that the company is paying to the bond holders might be less than the company would have to pay if borrowed from banks.

3)The Company doesnt have to compromise on the ownership when issuing bonds.

4) The company need not answer the bond holders and can take decision on their own without informing the holders and hence enjoying the liberty.

5)Stock issuance results in decrease in the EPS since number of share holder increases.

Disadvantages

1)The issuer is in compulsion to pay the holder the interest irrespective of the financial status.

2)The shareholders earning capacity in form of dividend might get reduced since dividend is not compulsory payment unlike interest.

3)The company will have to maintain a high credit rating in order to implement the successful issuing of the bond.

Advanatges of Shares

1)The money raised through issuing shares can be used for the growth and operations of the company or anywhere else without any restrictions unlike bonds.

2)Unlike bonds , shares need not be repaid as its not loan.

3)Dividend payment is not compulsory unlike bond.

4)A corporation can repurchase the shares issued if it wants the EPS of the company to increase and make better investment option.

Disadvantages.

1)The cost of borrowing may be higher than bonds since the company dont enjoy the tax deductions on the dividend paid.

2)Since shareholders are owners , the shareholders permission is required when taking primary decisions and they have to be sent through email asking for e voting by the shareholders.

For the issuing firm , bond issuing could be more risky for the fact that it has to pay the dividend inspite of the loss incurred.