CORPORATE FINANCE

Corporate Finance



Executive Summary

A company can finance its operations throught two modes. It can either go for equity financing or debt financing. In debt financing, a regular fixed income security is bond which company issued with maturity of 10 years or even more. Bond issuance has many advantages over stock like it interest payable on bonds acts as a tax shield. Unlike bonds, stock results in ownership dilution. It is also argued that cost of bonds is lower than cost of equity. On the other hand, bonds also have inherit disadvantages. The company must pay interest irrespective of the fact if it is making sufficient profits. The issuance of debt also increases the risk for the company. bond contracts often comes with clauses that directly hinders with the long term development of the company and may result in a conflict between shareholders and bondholders. The price of the bond is inversely related to the bond yields. In our company, it will result in savings because it is issuing at a rate above than the market rate.

Corporate Finance

Introduction

Financing decisions are crucial for every organization. These decisions are related with the means in which company manage and obtain long-term financing to obtain and preserve their prolific assets. There are two principal sources of funds: equity and debt. Every company has some equity as equity signifies ownership in the company. It comprises of capital contributions by the owners and also retained earnings of the company that have been reinvested. In addition, most firms opt for debt financing to meet the necessities of the business.

Debt financing can be defined as a method through which businesses borrow in order to raise capital for its operations. One of the sources of Long-term financing is long-term liabilities consisting mainly of the Bonds. Bonds are long term contracts under which a borrower agrees to make payment of interest and principal on specific dates to the bondholder, at a fixed rate that is predetermined. Most bonds are issued with maturities of 5 to 30 years.

Advantages and Disadvantages of Bond Financing

Bond issuance has many advantages over stock. The interest payable interest payable on bonds is deductible before tax therefore it acts as a tax shield for the company. On the other hand, dividends issued to shareholders do not provide such tax advantage to the company. stock issuance directly results in ownership dilution which might makes it difficult for the management to handle millions of shareholders. Bonds are issued mostly to institutional investors who are prepared to invest in the fixed income security over a long period of time. It is also argued that cost of bonds is lower than cost of equity.

While there are obvious benefits of bond issuance for the company over equity and rights share, it also comes with inherit disadvantages. The company must pay interest irrespective of the fact if it is making sufficient profits. Unlike bonds, dividends are payable on the discretion of the board which in turn subject to the financial ...