Final answer:
Companies choose common stock for financing to avoid mandatory interest payments and keep financial flexibility, while they might prefer debt to maintain control and benefit from tax deductions on interest payments. The decision is influenced by many factors such as financial status and strategic plans.
Step-by-step explanation:
Companies may opt for common stock as a means of financing their business because it doesn't require them to make mandatory interest payments regardless of their income, which can be especially beneficial during times of low revenue. Additionally, raising capital through the issuance of stock means the company isn't taking on more debt, potentially preserving its credit rating and financial flexibility.
However, a company may prefer debt financing for several reasons, one being the desire to retain control. By borrowing, whether through a bank or by issuing bonds, a company does not have to give up any ownership stake, which means existing shareholders maintain their control and influence over business decisions. Moreover, the interest payments on debt are tax-deductible, which can lower the company's tax burden.
Ultimately, the choice between common stock and debt as means of financing depends on a variety of factors including the firm's financial situation, market conditions, the cost of capital, and the strategic long-term plans of the company's management.