Question

If you owned a small firm that had become somewhat established, but you needed a surge of financial capital to carry out a major expansion, would you prefer to raise the funds through borrowing or by issuing stock? Explain your choice.

Answer 1

Answer:

I would issue stock because it is cheaper than borrowing.

Explanation:

First of all, issuing stock does not represent the obligation to pay interest over a long period of time, which can become very expensive if market conditions become adverse. Besides, if the company is small, it probably does not have the most advantageous financial conditions according to the banks, and the interest rate could be relatively high.

Besides, borrowing would mean increasing the liabilities in the financial statements, which could make the company less attractive for future investors.

Issuing stock does have the disadvantage of dilluting control of the company, because now stockholders own a piece of the company and could demand changes in management, and a different company strategy.