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What are the advantages and disadvantages of using bonds as opposed to stocks in order to raise money?

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Introduction:

Just like people need money, so do companies and governments. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. The extra comes in the form of interest payments. Bonds are known as fixed income Securities and one can know the exact amount of cash that they will get back as long as they hold the security until maturity.

Stocks are equity. bonds are debt. This is the important distinction between the two securities. By purchasing equity i.e. stock an investor becomes an owner in a corporation. Owner ship comes with voting right and right to share in any future profits. By purchasing bonds (debt), an investor becomes a creditor to the corporation or government whom so ever issues the bond.

Advantages
1. A bond is a long-term debt instrument with a final maturity generally ...

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"...This is the important distinction between the two securities. By purchasing equity i.e. stock an investor becomes an owner in a corporation."

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26 Practice Questions - Capital Structure

1. List and briefly describe the four components of working capital?

2. What is zero working capital and why would a company strive to achieve this?

3. Explain cash flow synchronization and at least 2 techniques that would be used to accomplish this.

4. Identify and briefly define the four variables of credit policy.

5. What is the Target Capital Structure and how would a company try to determine this?

6. Identify at least 3 types of projects a company might consider and provide an example of each.

7. Explain the difference between Mutually Exclusive and Independent Projects and provide an example of each.

8. Does NPV or IRR provide a more accurate result when analyzing a project? Why?

9. What is an opportunity cost? What is a sunk cost? Provide an example of each.

10. Why would a company evaluate an abandonment or shutdown project?

11. Identify at least 2 things that a company must consider when making a capital structure decision.

12. What is a post-project audit and what are the advantages and disadvantages of using it?

13. What is a bond? Identify and briefly describe at least 3 different types of bonds.

14. What is a call provision on a bond and why would a company call a bond?

15. What is the difference between common stock and preferred stock? What are the advantages and disadvantages of each.

16. What is the Target Capital Structure and why does a company strive to achieve it?

17. What is WACC and what implications does it have on the capital structure of a firm?

18. What is the Dividend Irrelevance Theory? What is the Bird-In-The-Hand Theory? What is the Tax Preference Theory?

19. Define the following:
a. Declaration Date
b. Holder-of-Record Date
c. Ex-Dividend Date
d. Payment Date

20. Identify at least 3 considerations when establishing a dividend policy and how they affect dividend policy.

21. Explain the difference between a stock split and a stock dividend.

22. What is an option?

23. Explain the difference between a put option and a call option.

24. Identify and briefly describe at least 3 issues unique to a multi-national corporation.

25. What is a lease? Identify and describe two types of leases and the advantages and disadvantages of each.

26. EXTRA CREDIT Identify at least 3 types of risk and provide a brief description of each.

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