Question

Suppose your company needs $5,000,000 for expansion. Discuss the advantages/disadvantages of

1. borrowing $5 million on a 10 year note at 5% annual interest;
2. issuing a 10,000 bonds with $500 maturity value ten year bond with a coupon rate of 5% semi-annual interest
3. issuing 50,000 shares of Common Stock with a par value of $5 for $100 per share;
4. issuing 5,000 shares of $1,000 Par 5% preferred stock that is non-cumulative.

Answer 1

Financing Options:	Advantages	Disadvantages
10 year note at 5%	1. No permanent financing. 2) re-paid in next 10 years. 3) Low cost of borrowing 4) One party borrowing.	1) Interest put pressure on earnings 2) Principle repayment put pressure on Cash flow.
10000 bonds with MV $500 & half year coupon rate 5%	1. No permanent financing. 2) re-paid in next 10 years. 3) Low cost of borrowing 4) More than one party borrowing.	1) Interest put pressure on earnings 2) Principle repayment put pressure on Cash flow.
Issuing 50000 Common Stock	1. Permanent financing 2) No fixed cost payable 3) Dividend paid if company earns 4) No periodical payments or redeemption.	1) Reduction of voting right 2) Diluting the shareholder control 3) a lot of formalities before issue 4) Not redeemable, so always exists.
Issuing 5000 Non-cumulative Preferred stock	1. Permanent financing 2) Dividend paid if company earns otherwise not 3) Dividend is not accumulated 4)No voting right reduction	1) No pressure as debt for payments 2) a lot of formalities before issue 3) Not redeemable, so always exists.