.111 Verizon 10:01 AM 100% moodle.bladencc.edu Chapter 19-Using Securities Marke
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.111 Verizon 10:01 AM 100% moodle.bladencc.edu Chapter 19-Using Securities Markets for Financing and Investing Opportunities critical thinking exercises Name: Date: critical thinking exercise 19-1 FINANCING GROWTH You've owneda tool and die company for the last five years. Even daring the recession, you have been earning a net profit of 30% on your investment and have boon able to pay yourself a rtasooable sala- ry, You are feeling so confident that you are considering expanding. You believe that your profit potential can improve greatly if yoa could expand your product line with newer high-tech equipment. You estimate that you will need $1 million for the expansion. What are your financing alternatives? Would yoa consider selling bonds if you had to pay 12% interest? 3 What are the major advanfages of using issuing bonds? What are the major disadvantages of using issuing bonds?Explanation / Answer
1. The options that the company has for financing are: issuing stocks through IPO, issuing bonds, raising debt from bank (loan), selling the current assets.
2. Yes, since 12% interest is more than the return on investment. Hence net value or profit will be added by issuing bond. Also, the interest payments will be tax deductible.
3. The major advantages of issuing bonds are that they are tax deductible, they are cheaper than the stocks.
4. The major disadvantage of issuing bonds is that they generate interest liabilities and constant cash payout (interest payments) even if the company may be in cash crunch.
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