Final answer:
The advantages of issuing long-term debt include maintaining control and tax-deductible interest payments. However, it can lead to financial instability and limited future access to capital. Issuing stocks provides access to large amounts of capital without debt repayment obligations, but it may result in dilution of ownership and control and extensive legal and regulatory requirements.
Step-by-step explanation:
When deciding between issuing long-term debt or raising funds through issuing stocks to finance a startup business, there are advantages and disadvantages to consider.
Advantages of issuing long-term debt:
- The firm retains control of its operations.
- Interest payments can be tax-deductible.
- No dilution of ownership or voting rights.
Disadvantages of issuing long-term debt:
- The firm commits to scheduled interest payments, regardless of its income.
- Could lead to financial instability if the firm struggles to make interest payments.
- Limited access to additional capital in the future.
Advantages of raising funds through issuing stocks:
- Access to large amounts of financial capital for expansion.
- No debt repayment obligations.
- Increased visibility in the financial markets.
Disadvantages of raising funds through issuing stocks:
- Potential dilution of ownership and control.
- Expensive process that requires the expertise of investment bankers and attorneys.
- Compliance with reporting requirements to shareholders and government agencies.