Benefits of Issuing Common Stock
What are the Benefits of Issuing Common Stock?
- Common stock does not have a fixed payment (like bond interest) that must be made to the holders. Dividends need to be paid only when the money to pay them is available and may also be limited in amount if the company has other needs for the cash.
- Shares do not mature and do not require a future repayment of the principal.
- Common stock provides the firm with greater flexibility in its financial structure because it does not have an obligation to make interest payments or repay principal. Furthermore, unlike debt financing, common stock does not have covenants that need to be maintained.
- The issuance of shares brings additional capital into the firm, thereby lowering its debt-to-equity ratio and the perceived riskiness of its capital structure. This lower debt-to-equity ratio will reduce the credit risk of the company and may lead to lower interest rates on future debt issues.