Bonds are a popular source of financing because bond interest expense is deducti
ID: 2447658 • Letter: B
Question
Bonds are a popular source of financing because
bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.
a company having cash flow problems can postpone payment of interest to bondholders.
the bondholders can always convert their bonds into stock if they choose.
none of the above
a.bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
b.financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.
c.a company having cash flow problems can postpone payment of interest to bondholders.
d.the bondholders can always convert their bonds into stock if they choose.
e.none of the above
Explanation / Answer
Bonds are a popular source of financing because
a) bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
As the interest on bond is tax deductible it helps the company to save to taxes. While on the equity the divivdend is paid out of after tax profits.
The only drawback on bonds is the fixed liabilty of interest that company has to bear whenever the interest is due.