Bonds are a form of interest-bearing notes payable issued by corporations, universities, and governmental entities. Bonds offer three advantages over common stock, as shown in Illustration below:
Advantages of Bonds
1. Stockholder control in not affected.
Bondholders don’t have voting rights, so current owners (stockholders) retain full control of the company.
2. Tax savings result.
Bond interest is deductible for tax purposes dividends on stock are not.
3. Earnings per share may be higher.
Although bond interest expense reduces net income, earnings per share o common stock often is higher under bond financing because no additional shares of common stock are issued.
More from this Section
- Gross profit method
Gross profit method is a method for estimating the cost of the ending inventory by applying ...
- Unit production costs
Unit production costs are costs expressed in terms of equivalent units of production. ...
- Present value
The amount that must be invested today at a given rate of interest over a specified time ...
- Independent internal verification
Most internal control systems provide for independent internal verification. This principle ...
- Consigned goods
Consigned goods referred as goods that held for sale by one party (the consignee) although ...