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An advantage of bond financing is: a
An advantage of bond financing is:
a. bonds do not affect owners' control.
b. interest on bonds is tax deductible.
c. bonds can increase return on equity.
d. it allows firms to trade on the equity.
e. All of these.
Expert Solution
The correct answer to the given question is option e. All of these.
The advantage of bond financing is that it helps in increasing the return on equity because when more debt is raised relative to equity for the overall capital, the return on equity ratio increases for the firm. Also, the interest paid on bonds or debt is tax deductible which helps in increasing the net income. The bond owners do not affect the control possessed by the shareholders of a firm. If a firm opts for bond financing, it can easily trade on the balance capital financed via equity.
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