(a) As a source of long-term financing, what are the major advantages of bonds over common stock? (b) What are the major disadvantages in using bonds for long-term financing?
1. Stockholders control not affected (bondholders do not have voting rights so current owners (stockholders) retain full control of the company.
2. Tax savings result (bond interest is deductible for tax purposes; dividends on stock are not.
3. Earnings per share may be higher (Although bond interest expense reduces net income, earnings per share on common stock often is higher under bond financing because no additional shares of common stock are issued.(pg 644 15-1)
A disadvantage of using bonds for long term financing is a company must pay interest on a periodic basis and it must repay the principal at the due date on the bond. A company with fluctuating earnings and a relatively weak cash position may have great difficulty making interest payments when earnings are low. (Pg 645)
are issued in the name of the owner, interest payments are issued by a check in the owner’s name. Bearer bonds are not registered and the holders of these bonds must send in coupons to receive interest payments.
can be convert into common stock at the bondholders option Callable bonds can be retired before there mature date for a stated dollar amount.
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