Week 06 Discussion - Debt vs. Equity FinancingPlace yourself in the position of an executive manager...

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Week 06 Discussion - Debt vs. Equity FinancingPlace yourself in the position of an executive manager (e.g., CEO, CFO, or COO) of The Home Depot. Further assume that you and your colleagues believe that it is time to further expand the company by way of new store locations. It is estimated that the cost of this expansion will be approximately $200 million. Of course, one of the key points of your discussion is the means by which the necessary funds will be raised.The questions that appear below have arisen during a meeting among you and your colleagues. How would you respond to these questions?   	What are the advantages and disadvantages to our company of financing the expansion by issuing bonds? By issuing common stock? 	In the current economic climate, is it appropriate for us to be considering this expansion? In other words, would such an expansion be in the best interest of our stockholders? Why or why not?  
	
Document Preview: Week 06 Discussion - Debt vs. Equity FinancingPlace yourself in the position of an executive manager (e.g., CEO, CFO, or COO) of The Home Depot. Further assume that you and your colleagues believe that it is time to further expand the company by way of new store locations. It is estimated that the cost of this expansion will be approximately $200 million. Of course, one of the key points of your discussion is the means by which the necessary funds will be raised.The questions that appear below have arisen during a meeting among you and your colleagues. How would you respond to these questions?What are the advantages and disadvantages to our company of financing the expansion by issuing bonds? By issuing common stock?In the current economic climate, is it appropriate for us to be considering this expansion? In other words, would such an expansion be in the best interest of our stockholders? Why or why not?

Robert · Accepted Answer

QUESTION: 
What are the advantages and disadvantages to our company of financing the expansion by 
issuing bonds? By issuing common stock? 
SOLUTION: 
Issuance of Bonds: 
The corporate expansion or increased research and development program can be financed by 
way of issuance of bonds. The debt can be defined as the funds obtained from the external 
sources like creditors, banks, lenders, issue of bonds, debentures etc. which grants loan in lieu of 
regular interest payments. The bonds are generally source of long term financing and it is not 
required to be repaid earlier.  
The main advantage of issuance of bonds is that the company can raise the capital without any 
change in the ownership. The benefit of maintaining the ownership is that the management has 
the complete control over the decisions made on behalf of the company. The interest is paid to 
the bondholders and the interest paid by the company is tax deductible. It can translate into large 
tax savings for the company. The issuance of bonds ensures more flexibility as the company is 
only obligated to investor or lender for the repayment period. Once the money is paid back, the 
business is completely free from all the obligations. The paper work involved in obtaining debt is 
less complicated and less expensive than equity financing.

Week 06 Discussion - Debt vs. Equity Financing Place yourself in the position of an executive manager (e.g., CEO, CFO, or COO) of The Home Depot. Further assume that you and your colleagues believe...

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