Question

Although stocks and bonds may both be viewed as investment opportunities, there are major differences between these two. Stock represents capital, the financial investment or equity, in a corporation. In a publicly traded corporation, individuals and groups buy and own shares of stock in the company. Shares of stock are traded (bought and sold) on one of the stock exchanges. For example, you might buy shares of stock in Coca-Cola, a publicly traded company. Publicly traded companies are very different from privately owned companies. Private corporations do not sell stock on a public exchange.

Bonds are debt issued by a government or corporation. Individuals and groups buy and hold these bonds as an investment. The government or corporation that issues these bonds guarantees payment of the original investment plus interest earned at a specific future date. For example, perhaps New York City wants to build a new tunnel and bridge. The city might issue a bond to finance this project.

Both stocks and bonds are used to raise money. Issuing bonds allows the corporation to maintain control since ownership is not changed. Issuing stock gives up control to the stockholders .

Scenario

Imagine you work for The XYZ Inc., a business that is a publicly owned corporation. Plans have been designed for a major business expansion that would take place over the next several years. You know your company will need to raise money to finance this project.

Instructions

Create report, about The XYZ Inc. and the project to raise money.

1. Discuss the project you have planned.

2. Are there any advantages to issuing bonds over stocks? Identify one advantage and explain why it is an advantage.

3. Are there any advantages to selling stocks instead of issuing bonds? Identify one advantage and explain why it is an advantage.

4. If you owned this corporation, would you want to sell your stock company or issue a bond? Explain your decision.

5. Now, imagine you sell the stock. Would you issue common stock or preferred stock? Why?

6. As an investor who wishes to make as much profit as possible in the long term. Would you want to buy stocks or bonds? Explain your answer.

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

As the problem already discussed the importance of both type of alternatives, there are many possible pros and cons to an entity.

An appropriate capital structure of a company should of such type that does not create a danger of hostile takeovers from other companies as there can be small amount of equity stock in companies overall capital structure.

At the same time, debt also should not comprise a major part of companies capital. During turbulent times it may have a negative impact on repaying ability of entity and may force company to force liquidation.

For XYZ Inc. 70% equity capital and 30% debt finance may be an appropriate capital structure.

1) Issuing bonds over stock provide many advantages, but one primary benefit is of tax saving. Interest over bonds is tax deductible expense and create a great financial advantage if a company can earn at the rate which is more than the rate of bonds. A company can use bond funds for its operations to earn at a higher rate which substantially covers the overall rate of bonds. Thus it create a great financial advantage to it.

3) one of the primary advantage of Issuing stocks over bonds is it is less risky. Unlike debt, company is under no fixed burdens of paying dividend to stockholders. A company has to pay only when it earns and at when it deems fit to distribute dividends. At initial phase of a company stock capital may be considered good because rate of earnings is less, a company may not bear payment interest. At that time stock capital provides a financial interest to the company.