What are the advantages and disadvantages of using Stock Financing from the viewpoint of the Corporation ?

The advantages of using stock financing are:

• Common stock does not obligate the firm to make fixed payments to stockholders

• Common stock carries no fixed maturity date

• Common stock increases the creditworthiness of the firm thus increasing the future availability of debt at a lower cost

• Common stock can often be sold more easily than debt if the firm’s prospects look potentially good but risky and

• Financing with common stock serves as a reserve of borrowing capacity

The disadvantages of common stock financing to the corporation:

• Issuing common stock extends voting rights and perhaps even control, to new stockholders

• Common stock gives new stockholders the right to a percentage of profits rather than to a fixed payment in the case of creditors

• The cost of underwriting and distributing common stock is high

• If common stock is sold to the point where the equity ratio exceeds that in the optimal capital structure, a firm’s average cost of capital will increase and its stock price will not be maximized and

• Dividends paid to stockholders are not tax deductible as is interest paid to creditors.