Chapter 14, Problem 3DQ

To determine

Concept introduction:

Sources of funds:

An entity can raise find through several sources like own capital investment, issuing shares (Common or preferred), issuing debt instruments or taking loans from lenders. Some sources of finance are discussed as follows:

Stocks (Common Stock and Preferred Stock):

These are two types of the share capital of a company. Common Stock represents the Common shares issued to the shareholders and preferred stock represents the preference shares issued. Preference shares are given preference in payment of dividends and repayment of capital. Common shareholders get the inbuilt right to vote in decisions of the company and preference shareholders generally do not get this right but they may get voting rights with special provisions.

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date.

To Indicate: The advantage of issuing bonds instead of obtaining the finance from the company’s owners.