As you will learn from your reading, there are basically only two sources of ext

Question

As you will learn from your reading, there are basically only two sources of external funding available to a corporation: equity and debt. Choose one of the following topics and present your analysis, which may include your personal opinions:

Suppose you decide to invest in corporate bonds. Accordingly, you visit a bond store. You see 3 bonds on the shelf. One is priced at $1,015.53, another is priced to sell at $1,300.00, and a third is selling at a discounted amount of $876.06. All have a $1,000.00 face value, and carry equal risk. From your reading, and from class lecture, you know that you will be earning the same rate on your investment, regardless of which bond(s) you purchase. But you have a friend with you, who doesn't understand how you can possibly earn the same interest rate, due to the difference in purchase price. How will you explain this concept to him or her?

Explanation / Answer

When there is boom market when Revenue are constanlty growing and there healthy cash flow from operation one should raise fund from bond as result of which there will be tax benefit on interest expense and EPS will increase . but in case when there is recession in market revenue and cash flow of company is not sufficent to meet its interest obligation than company shall not raise fund from bond issue rather it shall go for equity issue as there is no obligation on the part of company. Whether to go for bond issue and Equity issue depend upon market condition ,Revenue of company, cash flow of company and cost of fund .Generally cost of fund for bond issue is generally less than equity issue. Interest on bond is paid bycompany on the face value of bond not on market value of bond which keeps on changing due to change in interest rate policy issue of goverment.

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