Question

An advantage of obtaining long-term funds by issuing additional stock, instead of issuing bonds is? Multiple Choice 01:22:21 - O Dividend payments can be deducted for income tax purposes Expansion is accomplished without surrendering ownership control. Interest expense is tax deductible. It lowers the chance of bankruptcy because dividends for stock are not required payments, but interest expense for bonds are required payments.

Answer 1

Answer:

It lowers the chance of bankruptcy because dividend for stock are not required payments, but interest expenses for bonds are required payments.

Explanation:

When a comp[any issues additional stock instead of issuing bonds to obtain long term funds, the implications are:

1. Dividend payment on stock is optional payment as in the event of company incurring losses, no dividend is required to be paid. Such is not the case with bonds wherein a company must pay interest on debt irrespective of it's profitability or situation of financial crunch.
2. Bonds impose restrictions on the issuer such as restriction on payment of dividend, restriction on issue of additional debt or making cash expenditure. Such is not the case with issue of common stock which doesn't impose such restrictions.
3. Issue of Bonds hampers a company's credit ratings which is necessary for obtaining funds in the future. Such is not the case with issue of common stock.
4. But, dividend paid to stockholders isn't a tax deductible expense unlike Interest on debt which is tax deductible