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Question - Among the two primary financing types of debt and equity, debt has features that are attractive to corporations. Since bonds are safer to investors than stock, the required rate of return to investors is lower on bonds or debt; hence, the cost to the issuing corporation is lower. Additionally, debt interest is tax deductible to the corporation, while stock dividends are not-this makes the cost of debt even cheaper than stock. However, there are risks to the issuing corporation associated with bonds, which are not present with stock financing. These include risks of financial distress, which could lead to bankruptcy.
By learning from companies that have experienced financing mistakes, you can assess the risks and benefits of each type of financing. Prepare a post that addresses the following:
Explain why debt financing is the cheapest form of financing but also the most dangerous form of financing.
Research a company that went bankrupt because of this and explain how and why as it is related to financing.
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