Question

From the standpoint of the issuing company, what is a disadvantage of using bonds as a means of long-term financing?

A : Interest must be paid on a periodic basis regardless of earnings.
B : Bond interest is deductible for tax purposes.
C : The bondholders do not have voting rights.
D : Income to stockholders may increase as a result of trading on the equity.

Answer 1

Issuing bonds as a means of long-term financing can be disadvantageous for a company as they are required to pay interest on a periodic basis regardless of earnings.

Step-by-step explanation:

A disadvantage of using bonds as a means of long-term financing from the standpoint of the issuing company is that interest must be paid on a periodic basis regardless of earnings. When a firm issues bonds, it commits to making scheduled interest payments, even if it does not have sufficient income. This can create financial strain on the company if it is unable to generate enough revenue to cover the interest payments.