Question

The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?

a. interest payments are tax deductibles to the company, while dividends are not
b. the risk of going bankrupt decreases
c. expansion is achieved without surrendering ownership control
d. a and c

Answer 1

The advantages of issuing bonds over common stock for obtaining long-term funds are that interest payments on bonds are tax deductible and expansion can occur without giving up ownership control. The correct answer is d: a and c.

Step-by-step explanation:

The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include two key points:

• Interest payments are tax deductible for the company, while dividends paid on stock are not. This means that the cost of borrowing through bonds can be reduced by the tax savings on the interest payments.
• Issuing bonds leads to expansion without surrendering ownership control. Bonds are a form of debt, so the bondholders do not gain any control over the company's operations, unlike stockholders who gain voting rights and can influence company decisions.

Therefore, the correct answer to the student's question is option d: a and c, as both tax benefits and maintaining ownership control are advantages of issuing bonds over stock.