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

May 25th, 2013 Comments off
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The advantages of using stock financing are:

  • Common stock does not obligate the firm to make fixed payments to stockholders
  • Carries no fixed maturity date
  • Increases the creditworthiness of the firm thus increasing the future availability of debt at a lower cost
  • 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
  • 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.

In an organization, briefly explain the benefits or advantages and disadvantages of decentralization

May 21st, 2013 Comments off
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Benefits or advantages of decentralization:

  • Easier for senior management to delegate responsibility if the enterprise is split into divisions. By delegating responsibility, the managers might be motivated to work harder
  • Decisions will be made more quickly as the divisional managers will not need to send information up to top management and then wait for instructions to be passed down.
  • Divisional managers will make better decisions than centralized management as they are closer to the daily operation of the business
  • Top management will be free to concentrate on strategic issues.
  • Easier to monitor the performance of products and or regions if the business is divisionalized on product and or regional lines
  • Easier to allocate resources to a division than to a product or region which is contained within a centralized structure
  • Easier to expand, close or move a division.

In brief, decentralization assists top management in improving motivation, quicker communication, better control and faster or quicker decision-making.

The main challenge or disadvantage of decentralization is:

  • Get all the divisional managers to work for the advantage of the group as a whole. Especially if divisional managers receives performance-related pay hence they may put the needs of their own division ahead of the group.  Even without performance-related rewards, they may take decisions which seem sensible from a divisional point of view but not good for the group as a whole.

Financial Accounting


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