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What effect would you expect issuing a $100,000 ten year bond to have in terms of...

What effect would you expect issuing a $100,000 ten year bond to have in terms of the company’s decision to raise capital in this manner

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Answer #1

The first thing is company issues bonds to raise capital if they don't have sufficient retained earnings and to reduce the cost of capital becasue it is lower than the cost of equity due to its tax shields advantage. Due to issuance bonds, the debt weight will increase with respect to equity weight in the capital structure and if these are in optimal levels, then there will not be any high leverage issues.

On a negative side, company has to pay the coupons (interest) for the whole 10 year period which would stress the income statement.

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