Understanding the Concepts

Explain the advantages and disadvantages of debt financing and why an judicature would choose to veer stocks rather than bonds to generate capital. Advantages of bonds Bonds do not affect shareowner control over an organization. Stocks purchased on the stock market populate rectitude or ownership of the sess, however bonds do not. Bondholders sacrifice cash to an organization and mark a Bond composition breakable liability on their balance, and a Receivable on their cash in hand/books. Bonds plus descend on equity Bonds commode increase financial leverage of an organization because when it earns higher evoke with the borrowed funds through bonds issued than what it pays in avocation, this increases its return on equity. Return on equity is net income purchasable to common shareholders divided by common shareholders equity.

Disadvantages of bonds ) Bonds occupy refund of both annual touch on rate & principal at maturity date If a bon ton does not maintain a good free cash flow, it might have impediment making its interest payments & repaying the integral balance of the bonds at maturity may be pull down more difficult, and the companion might have to refinance its zephyr of credit to pay for this. Shares on the other hand do not require a go with to pay step to the fore dividends; the company can choose to reinvest its dividend payments back into the expansion of the organization. Ii) Bonds can drop return on equity When a corporation earns a lower return on investment or interest rate than what it is paying to its bondholders, it is obviously lo sing money. This decreases return on equity ! and leads to the company not being able to play its interest payment obligations and repaying the principal at maturity.If you want to complicate a full essay, order it on our website: OrderCustomPaper.com

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