Paper Example on XYZ Inc. to Raise Money: Bonds vs. Stocks

The project planned by XYZ Inc. aims to raise money. The corporation has an option to either raise money through selling stocks or issue a bond. A well-advised corporate financing practice entails determining either the mix of debt or equity and selecting the most effective option to raise money. There is an advantage of issuing bonds, which is significantly different from issuing of new shares by the business. The advantage of issuing bonds is that the firm will have the benefit of lowering its tax liability and taxable income. Similar to other corporate bonds, the principal amount of the bond debt is the loan, which does not increase the taxable income of the firm (Sojeva, 2015). Hence, the interest that is paid by the firm to the bondholders can be deducted from the firms income tax return.

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There is an advantage of selling stock over issuing stock as there are no debt repayments required. According to Vance (2014), to sell stock will offer the firm advantage of not owning investors any debt as the corporation is not borrowing. Also, a firm that has stock that is rising in value will increase the corporate's credit rating, which will make it easy to borrow financing in the future. The firm is required to continually justify its actions to the shareholders, which ensures the company remains profitable and focused on achieving the set objectives. Sale of shares by a firm generates equity capital, and it will be more financially viable if a company can sell additional stocks.

If I owned the corporation, I would prefer to issue a bond in raising money, which is a more viable and attractive proposition. For instance, the interest rate that the firm pays to the bond investors is less compared to the one required to obtaining a bank loan. To minimize the interest amount that is paid when issuing a bond needs to be taken into consideration, as the money that is used in paying is detracted from corporate profits. In most cases, corporates seem to issue bonds if the interest rates are at an extremely lower rate. According to Sojeva (2015), the ability to borrow huge amount of money at lower interest rates is viable as it offers the corporation the ability to investing in its growth. Subsequently, to issue bonds will offer the owner significant freedom to operate as it considers to be appropriate as there are no restrictions attached to bank loans.

If I sell the stock, I would preferably issue common stocks as they are more likely to outperform bonds and preferred shares. According to Warren (2009), common stocks offers the firm a considerable potential to attain long-term gains. However, offering common stocks means that the stockholder will be that last to be paid concerning the company assets. As an investor that wishes to make more profit in the long-term, I would instead buy stocks compared to bonds. For instance, if I invest in a company that has shown enormous potential to grow and raise profits, its valuation is going to rise significantly. Subsequently, as an investor, I will have a vote during the annual meeting and benefit from the rising stock prices and dividends. Hence, having an ability to exercising control over the policies made by the corporation will have an impact on the management that will offer an opportunity for growth.

References

Sojeva, D. (2015). Economic and legal advantages to business financing through the issuance of bonds. MPRA. 62751. http://mpra.ub.uni-muenchen.de/62751/

Vance, D. E. (2014). Raising capital. New York, NY: Springer.

Warren, R.V. (2009). Corporate financial accounting - 10E. South-Western Cengage Learning.