Google Corporate Debt

4^th Update: Google Sells Its First Corporate Debt Deal by Kellie Geresssy- Nilsen

Table of Contents

Cost of capital refers to the amount that a company will have to compensate the capital providers after obtaining capital from them. There are various sources of capital financing. Corporate debt also known as corporate bond is one of these sources. Corporate bonds are major source of capital financing for many businesses. Google is one of the most recent companies to use this method of capital financing. On May 16, 2011 Google sold it first corporate debt deal. Google sold $ 3 billion worth of bonds that will be split in 3, 5 and 10 years tranches. After the offer was issued, orders surpassed the $ 10 billion dollar mark. Though Google management was not specific on what they planned to do with the borrowed funds, it has been widely speculated that they plan to use this finances to expand their operations.

Google may have various advantages and disadvantages by using corporate bonds in financing its planned activities. The first advantage is the low cost of capital associated with the bond. According to many analysts the corporate bond borrowing cost is at its lowest in so many years, with analyst giving an average interest rate figure of 3.8% (Nilsen, 2011). Many analysts have argued that Google has a lot liquid resources that it could use to finance its activities and therefore the move to issue the bonds is interpreted as a move to take advantage of the low borrowing rates. Another advantage associated with corporate bond financing is that the ownership of the company is not relinquished to new parties (Peavler, 2011). This is a unlike equity financing where the company has to deal with the reality of having to remain accountable to the new share holders and sharing the company’s profits with them. This means that Google shareholders will get the capital they need without diluting their control over the company.

Reference

Nilsen G. K. (May 16, 2011). Google Sells Its First Corporate Debt Deal. Wall Street Journal. May 25, 2011. Retrieved from http://online.wsj.com/article/BT-CO-20110516-715147.html

Peavler R. (2011). Debt and Equity Financing. May 25, 2011. Retrieved from http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm

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