Continuing Case Solution
1
Chapter 15
(a)
[Note to the instructor: You could require the students to show the journal entry
for issuing each type of debt or equity instrument and the related interest or
dividend payments.]
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Debt vs. Equity Financing
Date: January 27, 2013
Borrowing money from a financial institution offers many advantages over other
types of debt financing, such as bonds. Borrowing money from the bank is often
faster and more flexible, and the associated issuance costs are much lower.
The major disadvantage of this type of financing is that the amount of
money that can be obtained is much more limited than could be through the
(b)
Based on CM2
equity financing over debt. The company will be able to raise a large amount of
capital without incurring additional indebtedness. With a common stock issue, the
Additional Activities: Extend your accounting knowledge
The company could issue:
Continuing Case Solution
2
1) Preferred stock. Preferred stock generally has preferential treatment in terms
of dividends. It can be designated as non-voting; in that case there is no
threat of a hostile takeover or loss of management control. The stock can also
2) Convertible bonds. The company could issue convertible bonds. In this case,
the bondholders could convert their bonds into common stock at a pre–
defined rate. The conversion feature makes the bond attractive to potential