Question

In order to fund the expansion, Tesco could raise additional long term funds by issuing debt or equity. You are required to provide a critical analysis of the factors that Tesco would need to consider when deciding between issuing more debt or equity. You should relate you discussion to theory wherever possible.

Answer 1

Factors that should consider when deciding between issuing more debt or equity

cost of fund- As we know every fund has it cost, as dividend in case of stock and interest in case of debt. Debt carries a fixed obligation in the form of debt irrespective of whether company has earned profit or incurred loss while in case of stock dividend would be paid only when company will earn profit. so debt create a fixed obligation in form of interest.

2- Dilution of control - In case of stock issue, control would be diluted while in case of debt there is no dilution of control

3- Risk- Low risk is involved in case of debt issue while degree of risk is high in case of equity

4- Tax benefits - there are various tax benefits avaiable in debt issue as interest payment is a tax dedutable expense which reduces the cost of debt while on stock issue such kind of benefits are not available