Comparing Debt and Equity Financing

Raising capital by selling bonds is called debt financing, whereas, raising capital by selling stock is called equity financing. Read the following scenario and answer the question.

Living Well, Inc. has decided to expand its operations to owning and operating long-term health care facilities. The following conversation occurred between the chief executive officer, Ron Smithson, and the vice president of finance, Murphy Lee.

Ron: Murphy, have you given any thought to how were going to finance the acquisition of St. Sharons Health Care?

Murphy: Well, we have two basic options, we either sell stock or sell bonds. The current equity market is a little soft and rumor is that the Federal Reserve Bank may increase the interest rate later this month or next.

Ron: Yes, Ive heard that too. The problem is, we dont have time to wait, especially on a rumor. We need to make a decision by the end of this week if we want to be in position to complete the acquisition under the current terms.

Murphy: The bond market is strong right now as investors are looking for a secure cash flow with minimal risk. I think our best choice is to issue bonds.

Ron: I have to agree and St. Sharons financial statements show it can take on debt. The only thing that is worrisome is the cash flow issues from delayed insurance and government reimbursement. But, that is the nature of the industry, isnt it?

Part I:

Write about the advantages and disadvantages of issuing stocks verses bonds. Use business writing, provide examples, and include visuals to be clear in your explanation.