Big Bertha's Birds decided to issue bonds to generate cash. Which of the following would be reasons for Big Bertha to use a bond as opposed to issuing common stock?
I The cost of bonds is lower than common stock
II The bond interest is tax deductible for Big Bertha
III The administrative costs are less
A)I
B)II
C)III
D)I & II
E)I, II, and III

Question

Quizplus · Accepted Answer

Big Bertha uses bonds, as opposed to common stock, because it was a lower cost option than issuing the common stock. Plus, the interest Big Bertha has to pay out is tax deductible to the company.
Key Takeaway: The advantages for a corporation to issue bonds instead of common stock is that they cost less, due to the tax deductibility of the interest payments and because the bond is a formal contract to pay the interest and principal payments to the bondholders. Dividends for common stock are not tax deductible. Administrative costs are not a factor when choosing between common stock and bonds.

Big Bertha's Birds Decided to Issue Bonds to Generate Cash