Final answer:
Debt financing allows a firm to retain control over its operations, but requires fixed interest payments. Issuing stock provides funds without fixed repayment but dilutes ownership and control. The choice depends on the firm's financial strategy and tolerance for risk.
Step-by-step explanation:
When discussing the increased use of debt financing with the CFO and finance team, it's important to consider both the benefits and risks involved. One major advantage of utilizing debt, such as borrowing from banks or issuing bonds, is that the company maintains control of its operations and is not subject to shareholders. This means that owners can make decisions without needing shareholder approval. However, the disadvantage of debt financing is the obligation to make regular interest payments, regardless of whether the firm's income suffices.
Issuing stock is an alternative to debt that involves selling ownership in the company to investors. The primary upside is obtaining funds without the responsibility for scheduled repayments, which can be advantageous for cash flow. Moreover, it ties the repayment obligation to the company's performance through dividends, which are not mandatory. Yet, this comes at the cost of ceding a portion of control over the company and taking on the responsibility to a board of directors and shareholders.
Ultimately, a firm must assess its financial position, growth projections, and the potential impact on operations while choosing between sources of financial capital. The decision should align with the firm’s strategic goals and risk tolerance.