Final answer:
Determining whether to sell bonds or issue stock involves weighing the debt commitment and control aspects of bonds against the capital access and ownership dilution of stock, reflecting a strategic capital budgeting decision for companies.
Step-by-step explanation:
Determining whether to sell bonds or issue stock is not solely a financial calculation but also a strategic decision for a company. When a firm issues bonds, it borrows funds and commits to fixed interest payments over time, which could strain finances if income fluctuates. However, the significant advantage is that the firm retains control over its operations, avoiding influence from shareholders. On the other hand, issuing stock transfers company ownership in exchange for capital, removing the burden of debt repayment but introducing new accountability to shareholders and potentially altering company control.
For an established small firm looking to expand, issuing stock might seem attractive due to the infusion of capital without the obligation of scheduled repayments. Nevertheless, this comes at the cost of selling company ownership and may require expertise in financial markets, as well as adherence to regulations by bodies like the Securities and Exchange Commission (SEC). Such complex decisions involve analyzing both immediate financial needs and long-term business goals, demonstrating the delicate balance within capital budgeting decisions.