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As a Stockholder I favor a finance strategy of using 47% stocks and 53% bonds for the following reasons:
Issuing stock would help my company raise capital. If my business doesn’t have enough ratings or I am just starting the company, I will not be able to borrow the money I need. Now If I incorporate, I will be able to sell stock instead to get money. This is particularly attractive because being a start-up with no track records. In this manner I can attract these investors based on my potential for profit and growth. The advantage of selling equity is that there’s no obligation to repay the investor for the shares sold. If the business fails, the stock becomes worthless, but the company doesn’t have to make the investor whole. The disadvantages are that the investor have certain legal rights that come with owning a piece of my business. Typically, stock investors have voting rights to elect members to the board of directors. They are entitled to a proportional share of any dividends the company pays. If the company is successful and receives a certain amount of cash, then all shareholders are entitled to receive payment from the company for their shares.
By issuing bonds I agree to pay investors interest in exchange for using their money. That interest is tax-deductible as an expense for my company. The advantage in in it is that bondholders don’t own a piece of my business and they don’t participate in decision-making. Another advantage of bonds is that I can issue them whenever I need money. This is a contrast to stocks, which companies typically issue only once, because a second offering of stock tends to dilute the share price due to extra supply. Bonds also offer the advantage of allowing companies to borrow money only for the time I will need it. The advantages are that I must pay interest on bondholders and that differs from dividends, which I only must pay when I declare one. I will pay interest according to a strict timetable. This can create problems with my cash flow. I may have times when I will wish to have used my cash for expansion or to buy assets, but I will have to pay the interest on bonds instead. Another disadvantage of bonds is that they increase the amount of debt shown on my books.
The right choice for my business will depend on how much control I will be willing to give up and how much risk I would like to take.
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