Reference no: EM133040274

Question - You are invited to a lunch meeting by the Chief Executive Officer of your company. She advises you that the company is currently contemplating a $100 million expansion which will be financed either from the issue of additional common stocks or 10-year 8% semiannual $1,000 par fixed rate bonds. She is aware that you are currently enrolled in Washington University's MBA Program and would like you to advise her on the pros and cons of issuing common stocks instead of bonds and vice versa, and the pros and cons to investors for investing in stocks instead of bonds and vice versa.

a. List TWO advantages to a company for issuing fixed rate bonds instead of common stocks to finance this expansion.

b. List TWO disadvantages to a company for issuing fixed rate bonds instead of common stocks to finance this expansion.

c. List TWO advantages to an investor for investing in common stocks instead of fixed rate bonds.

d. List TWO disadvantages to an investor for investing in common stocks instead of fixed rate bonds.

e. If the company wishes to finance the expansion using only common stocks, it will distribute dividends in the first year of $2.50, $2.75 in the second year, $2.90 in the third year, after which dividends will increase at a constant rate of 5% indefinitely. How many common shares should the company issue today to finance the expansion if the market has an 8% required rate of return?