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You are the chief financial officer of Super Company. Your company needs to raise capital to...

You are the chief financial officer of Super Company. Your company needs to raise capital to pursue an expansion project, but the company does not want to sell additional common stock. What factors should you consider in deciding whether to issue debt or preferred stock?

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Answer #1

Debt means amount owed to outsiders for giving a short term or long term loan to the company and generally carries an interest.

Preferred stock is a kind of stock which gives rise to preference shareholders who get priority when dividends are distributed.

The factors to be considered while deciding whether to issue debt or preferred stock are mentioned below:

- The interest payout to the bondholders even in a case of non profitability.

- The tax shield benefit due to the interest payout.

- Whether the firm has steady cash flows or not to ensure that it is able to meet the interest obligations in case is debt is issued.

- Whether the top management wants to dilute its stake in the company by issuing additonal equity.

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