respond to both

Fire102

Apa 200 words or more respond and REF

Madison Color, Inc. is the company I have chosen as an example of one that uses stocks instead of borrowing. The SEC filing for Madison Reed or Madison Color, Inc. stated in number 9 “Type(s) of Securities Offered” that equity and other is marked. Other describes the type of securities offered. Madison Reed offered “Series C Preferred Stock and the Common Stock issuable upon conversion”. This is a way of issuing stock but not giving up ownership of the company.

            Amy Errett, the founder of Madison Reed, raised a total of $32.1 million by July of 2014 (Lindner, 2015). Her company is number 319 in the top 500 according to Internet Retailer. Their web address is https://www.digitalcommerce360.com/internetretailer/ (Lindner, 2015). I choose this company because it is a new company and the fact that it is female owned, run, and created.

Advantages of using Equity to finance your company:

1.      There is no debt meaning no interest to pay during the year.

2.      Less risky to the owner of the company.

Disadvantages of using equity:

1.      Selling the ownership of the company away.

2.      Issuing stock is more costly

3.      Pay higher income tax per year

4.      Lower earnings per share.

Advantages of borrowing from the bank

1.      Interest expense will lower the amount of income tax is due

2.      Ownership is not diluted

3.      Higher earnings per share.

Disadvantages of Borrowing from the bank:

1.      Risker form of financing

2.      Borrowing is debt that the business has to pay back

Advantages of Issuing Bonds:

1.      The interest expense will lower the amount of income tax is due.

2.      Bond rates are set differently from bank rates.

3.      Bonds can be recalled or bought back before maturity in the event that interest rates are lower.

4.      Higher earnings per share.

Disadvantages of Issuing Bonds:

1.      Bonds are a debt that makes them risker than stocks.

The advantages and disadvantages are found in our book on page 319

Fire103

  Issuing bonds is a type of financing through which organizations can raise capital directly from members of the public (Bolton & Freixas, 2015).  The organization, in turn, promises to pay back the amount, with interest, after a specified period.  An advantage is that it does not change the ownership of the company because bondholders do not have any right to the management of the company (Bolton & Freixas, 2015).  Another advantage is that the corporation can stipulate the specific interest rate paid to the bondholders.  Lastly, the owners of the corporation do not have to share with the bondholders the profit earned from the capital raised by the bonds.

The disadvantages of issuing bonds is that is that the bondholders only get the promise that they will be paid as opposed to the shareholders who become the owners of the company. It, therefore, means that if the organization fail to fulfill the promise, then the bondholders are likely to suffer losses. It makes issuing bond less favorable investment.  The company is also forced to pay the bondholders first in case of bankruptcy (Gilson & Vetsuypens, 2014).    

Borrowing from Banks

            Capital can also be raised by borrowing from banks.  An advantage is that, like with bonds, it does not change ownership of the business.  Another advantage is that the interest to be paid by the company depends on the prevailing economic situation (Bolton & Freixas, 2015). For instance, if the interest rate goes down, then the organization may be allowed to pay the loan using the new interest rate.  Banks also allows for negotiation on the payment terms in certain cases. 

            Borrowing from the banks can be disadvantageous in that interest rates may increase due to inflation factors and this means that the company would have to pay more in return. Another disadvantage is credit line limits. The organization may not be allowed to borrow money beyond a certain limit.

 Equity Financing

Equity financing is a method used to raise finance by selling stock (that is, shares) in the company.  One of its advantages is that the investors become owners of the company (Bolton & Freixas, 2015).  It is advantageous to the company in that if the business fails to make a profit in a given fiscal year, then the shareholder may forego their dividend or the dividends are carried forward until the company makes a profit. The disadvantage of equity financing is that it may result in a change in the management of the company.   

Example

Business owner Warren Brown of Cake Love cake company financed his business with short and long-term notes.  Today he has a lucrative company generating sufficient income to take care of his liabilities of interest and principal on long-term debt and have enough to produce revenue and grow.

Bolton, P., & Freixas, X. (2015). Equity, bonds, and bank debt: Capital structure and financial market equilibrium under asymmetric information. Journal of Political Economy, 108(2), 324-351. Retrieved

Gilson, S. C., & Vetsuypens, M. R. (2014). Creditor Control in Financially Distressed Firms: Empirical Evidence. Wash. ULQ, 72, 1005.

Wild, J. J., Shaw, K. W., & Chiappetta, B. (2011). Financial & managerial accounting: information for decisions. New York: McGraw-Hill Irwin.