Chapter 20, Problem 1CQ

Summary Introduction

To explain: The reason for the debt offerings being more common and larger than equity offerings.

Debt:

Debt means the money, which is owed or is borrowed from a person. It is that kind of capital in which the interest and repayment of principal are fixed at pre-determined intervals. The issuer is obliged to pay the interest and principle amount at the specified rate and time.

Equity:

Equity represents the stock of the company with some ownership interest. It is also a kind of capital in which the issuer is not obliged for any capital investment, which is made by the shareholder but the shareholder is a part of the profit or loss of the company.

Answer to Problem 1CQ

The debt offerings and equity offerings are both parts of the capital structure. However, the debt offering is more common and larger also. The reasons for this is as follows:

• There are a lot of regulations under the Security Exchange Commission for the offering of equity. In comparison, the debt offering has very little regulations.
• The debt offering can be done easily but equity is issued when the owner of a company wants to sell the proportion of his share to the public.
• The equity offering takes a lot of time than the debt offerings. The company can take debt in less time compared to the equity.

Explanation of Solution

• The debt offering means that a company offers total or portion of its shares to the debt holders to purchase the bonds at a rate and price, which is predetermined and specified for a given period of time.
• The equity offering refers to the offering of the shares by a company in public. Those who purchase the equity are part of the profit and loss of the company and so they are called as shareholders.
• Thus, there is the difference between the debt offering and the equity offering.

Conclusion

Thus, the debt offering is more common and larger than the equity offering.