From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that
A)bond interest is deductible for tax purposes.
B)interest must be paid on a periodic basis regardless of earnings.
C)income to stockholders may increase as a result of trading on the equity.
D)the bondholders do not have voting rights.

Question

Quizplus · Accepted Answer

Bonds require a fixed payment of interest on a regular basis, regardless of the company's earnings. This can sometimes be a burden on the company's cash flow, especially if earnings are low. Bond interest being deductible for tax purposes (option A) is actually an advantage for the issuing company. Income to stockholders increasing as a result of trading on the equity (option C) is also not a disadvantage of using bonds as a means of financing. Finally, the fact that bondholders do not have voting rights (option D) is a characteristic of all debt financing, not just bonds, and is not necessarily a disadvantage for the issuing company.

From the Standpoint of the Issuing Company, a Disadvantage of Using