07. How Companies Raise Money

Описание: The sources examine corporate financing methods, distinguishing between *short-term* and *long-term capital procurement**. **Short-term debt* provides operational flexibility and is typically cheaper than long-term debt, though it carries a higher insolvency risk. Examples include bank loans, which often feature compensating balances that raise the effective interest rate, and commercial paper (CP).

*Long-term financing* involves corporate bonds (debt) and common/preferred stock (equity). *Corporate bonds* are fixed debt instruments requiring mandatory interest and principal repayment. A major advantage for the issuer is that interest payments are tax-deductible, resulting in a lower capital cost compared to stock. Bond types are categorized by security (e.g., mortgage bond), interest payment (e.g., coupon bond, discount bond), and repayment schedule (e.g., callable bond, sinking fund bond). High-risk bonds are often termed junk bonds.

*Common stock* represents permanent capital, offering flexible dividend payments tied to profit. However, common stock typically has a higher capital cost than debt. Stock issuance decisions must address preemptive rights to prevent dilution of existing shareholder control and wealth. *Preferred stock* grants priority over common stock regarding dividends and residual assets, but its dividends lack the tax benefits of bond interest.

Additionally, **option securities**, such as Bonds with Warrants (BW) and Convertible Securities (CB), combine the features of both debt/preferred stock and common stock, providing investors with the right to acquire or convert to common shares. Korean firms reportedly prefer internal funding (retained earnings) first, followed by bank loans, bonds, and then stock issuance.