Liabilities Related to Long-Term Financing Makemore Corporation is quite profitable at present and anticipates substantially increased sales during the next decade.

The company wishes to evaluate several alternative ways of acquiring the cash needed to expand its production facilities to meet the increased demand.

a. Why might it be desirable to issue additional long-term debt rather than common stock?

b. If Makemore issues additional long-term debt and the market rate of interest is 8 percent, what effect would issuing bonds with a stated interest rate of 7 percent have on the amount of cash received at the time the bonds are issued? Explain.

c. Makemore issued long-term bonds 2 years ago. The amount of interest expense recorded annually is less than the amount of interest actually paid on the bonds. What conditions would lead to this situation?

d. The controller suggests that one way of avoiding paying more than 7 percent interest is to issue convertible bonds.
Why might the company be able to avoid paying a higher interest rate by issuing convertible bonds? What risk is associated with issuing convertible bonds?