BUSN320 Regent University Debt and Equity Financing Paper Two (2) response posts ranging from 75-125 words Posts to respond too are attached below This w

BUSN320 Regent University Debt and Equity Financing Paper Two (2) response posts ranging from 75-125 words

Posts to respond too are attached below

This weeks study ———–

When we look at the different types of debt and equity financing, we find bonds, common and preferred stock. In an initial post discuss what are the advantages and disadvantages of each? Which is more expensive for a company to pursue when raising funds and why so?

Read: Block & Hirt, Chapters 16 – 17

Block, S.B.; Hirt, G.A. & Danielsen B.R. (2016). Foundations of Financial Management. New York: McGraw-Hill 16thEdition Post #1 – Robert Lynch
Bonds offer safety of principal and periodic interest income, which is the product of the
stated interest rate or coupon rate and the principal or face value of the bond. Bonds are ideal
investments for retirees who depend on the interest income for their living expenses and who
cannot afford to lose any of their savings. Bond prices sometimes benefit from safe-haven buying,
which occurs when investors move funds from volatile stock markets to the relative safety of
bonds. You can buy bonds directly through your broker or indirectly through bond mutual funds.
The disadvantages of bonds include rising interest rates, market volatility and credit risk.
Bond prices rise when rates fall and fall when rates rise. Your bond portfolio could suffer market
price losses in a rising rate environment. Bond market volatility could affect the prices of
individual bonds, regardless of the issuers ‘underlying fundamentals. Credit risk means that
issuers could default on their interest and principal repayment obligations if they run into cashflow problems. Some bonds have call provisions, which give issuers the right to buy them back
before maturity. Issuers are more likely to exercise their early-redemption rights when interest
rates are falling, so you then might have to reinvest the principal at lower rates.
Preferred stock is hybrid security that has the characteristics of both debt and equity.
Similar to fixed income securities preferred stock pay a preferred shareholders a fixed periodic
preferred dividend. Like equity, preferred stock represents an ownership investment that does
not generally require the return of the principal.
Risk to investors: Preferred stock being a hybrid debt can be suspended from time to
time. Profitability is required to pay out the dividends. Any omitted payments are accumulated
and made up for later. Thus, a steady cash flow is not always guaranteed.
Risk to issuers: In liquidation and bankruptcy proceedings, preferred stock acquire the
rights of creditors. For preferred stock, dividend expense is paid after using after tax profit. So
tax savings on interest expense makes debt financing less expensive than preferred stock
financing. After years of making losses, if a company makes profits, the accumulated preference
dividend will have to be paid out first thus diminishing cash flows.
Author, S. (2019). The difference between preferred stocks and bonds. New York:
Newstex. Retrieved from http://eres.regent.edu:2048/login?url=https://search-proquestcom.ezproxy.regent.edu/docview/2251441981?accountid=13479
Fisher, B. (2016, Jan 15). 7 ETFs that could pan out in ’16 money manager picks treasuries, gold
miners, high-quality bonds and preferred stock favored. Investor’s Business Daily Retrieved
from http://eres.regent.edu:2048/login?url=https://search-proquestcom.ezproxy.regent.edu/docview/1756744939?accountid=13479
Post #2 – Matthew Underwood
Financing Discussion 6
With financing, we often come across common stock, preferred stock, and stock. Each of
these hosts advantages and disadvantages of usage. Common stock provides the highest rate of
return of the three. Common stock has provided a six percent real rate of return in the long run
which gives “one of the best means to stay ahead of inflation” (KenFaulkenberry, 2019). On the
other hand, common stock is the most risky and volatile for the owner. There are no guarantees
with common stock (KenFaulkenberry, 2019). Preferred stock increases a firm’s financial
leverage and is useful for corporate restructuring (Advantages and Disadvantages). Preferred
stock is less risky and more flexible than common stock but provides similar growth
potential. Preferred stock can be difficult to sell though because dividends can go unpaid and the
returns are fixed (Advantages and Disadvantages). Bonds are the safer investment for
buyers. They are the “ideal investments for retirees who depend on the interest income for their
living” (Basu, 2019). They provide steady income and interest rates. Bonds are reactive to rates,
so market volatility and credit risks cause disadvantages (Basu, 2019). Preferred stock seems to
be the least worthwhile for a company to pursue. Preferred stock provides no tax deductible and
is suc the least used (Block, 2019).
References
Advantages and Disadvantages of Preferred Stock. (n.d.). Retrieved
from https://www.scribd.com/doc/75932383/Advantages-and-Disadvantages-ofPreferred- Stock.
Basu, C. (2019, March 5). Advantages and Disadvantages of Bonds. Retrieved
from
https://finance.zacks.com/advantages-disadvantages-bonds-2350.html.
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial
management.
Dubuque: McGraw-Hill Education.
KenFaulkenberry. (2019, April 24). What is Common Stock? Advantages and Risk.
Retrieved
from http://www.arborinvestmentplanner.com/common-stock-advantages-risk-2/.

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