which of the following is an advantage to a firm to issue co

which of the following is an advantage to a firm to issue common stock over long-term debt?

Solution

From the issuing firm\'s perspective, the major advantages of long-term debt financing are as follows:

1. Debt is least costly source of long-term financing. It is the least costly because:

* Interest on debt is tax-deductible,

* Bondholders or creditors consider debt as a relatively less risky investment and require lower return.

2. Debt financing provides sufficient flexibility in the financial/capital structure of the company. Flexibility in capital structure of the company can be increased by inserting call provision in the bond indenture. In case of over capitalization, the company can redeem the debt to balance its capitalization.

3. Bondholders are creditors and have no interference in business operations because they are not entitled to vote.

4. The company can enjoy tax saving on interest on debt.

Long-Term Debt Advantages

Long-term loans are normally secured by your building, equipment or other assets. This generally affords you a reasonable interest rate, meaning your costs of the loan are modest. You also pay off the loan anywhere from two to 30 years, in monthly installments. By issuing debt, you can invest in and grow the business now without giving up a portion of control. The bank\'s only concern is the debt repayment.

In general,

When you issue stock, you have no obligation for repayment of the funds. Instead, you have other owners to share the risk of the business investment with. Since you have no debt obligation, you don\'t pay finance fees. Along with the financial benefits, taking on stock investors is also a way to bring motivated experts into the fold. If you want to grow your business into an area of technology that you are less familiar with, bringing on investors with technological strengths can help your business.