Reference no: EM131514986

When a company issues bonds to raise capital they experience several advantages. First, it will impact the companies retained earnings, “issuing bonds allows a company to access capital much faster than if it first had to earn and save profits” (fool.com). In other words you have to spend money to make money. This method is faster and has tax benefits. A second advantage would be to take a look at selling their assets. However, a company needs to have assets that they are willing to sell, “growing companies might decide to borrow money rather than selling assets because they’re growing and in the process of acquiring, not selling assets…in down markets, a company may be reluctant to sell assets if it can’t find a buyer willing to pay an acceptable price” (fool.com). This could also lead to possible tax benefits. A third advantage would be that issuing bonds is cheaper than issuing shares. When shares are sold the value of existing shares are decreased, “since shareholders take on more risk than bondholders, shareholders require a higher rate of return than do bond investors” (fool.com). A fourth advantage is that issuing bonds offers tax benefits. It can reduce the amount of taxes a company owes, “that’s because the interest a company pays its lender is counted as an expense, which means pre-tax profits are lower…retaining earnings and issuing shares, on the other hand, may be more expansive to shareholders” (fool.com). Of course, a disadvantage is that when a company borrows money, it needs to pay interest to its lenders on a regular basis. Borrowing money can be risky compared to other options. “If a company borrows too much money, or if its fortunes change and it is no longer able to pay back its lenders, it might have to raise even more capital on painful terms or go bankrupt” (fool.com). When a company borrows money from the bank, they have complete control over what they do with the money. However, paying back the loan is that company’s responsibility and if they do not it could result in foreclosure. An advantage with this option is flexibility. Companies have the ability to shop around for loan terms that best suit their needs. However, interest rates can rise, which can make paying a loan difficult to pay back, “interest rates and other terms can change the repayment period, making the success of your business subject to alterations in the bank’s demands”(Writer, 2013). Credit history is a crucial factor for getting a bank loan and poor credit can be a significant obstacle for companies to secure a loan. Equity financing can be less of a burden, because there is no loan to repay. “This can be particularly important if the business doesn’t initially generate a profit” (thehartford.com). Equity can also be more preferable if companies have a poor financial track record. Equity financing can also help form partnership with experienced individuals, which could potentially benefit the business. A disadvantage would be that investors will expect a profit. However, “it could be a worthwhile trade-off if you are benefiting from the value they bring as financial backers and/or their business acumen and experience” (thehartford.com). Equity financing can also lead to potential conflict. Surprisingly, Apple issues bonds although they earn quite a bit of money. “According to analyst estimates, Apple has $145 billion of cash-but only $45 billion on hand in the US, and thus not enough to fully fund the share buy-back program” (Worstall,2013). About $100 billion of the money Apple has earned has been outside of the US. Since this is the case, they currently don’t have to pay the corporate income tax. Therefore, Apples’ offshore profits have paid very little tax so far, “so they would have to pay a substantial percentage of that tax if they were used to pay the increased dividend or to finance the announced share buy backs” (worstall,2013 ). This is why Apple is issuing bond. They can use it to pay the dividend and so on.