GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Cost of Equity Share Capital is more than cost of debt because
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Equity shares are easily saleable
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Equity shares have higher risk than debt
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Face value of debentures is more than face value of shares
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All of the above
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Explanation:
Detailed explanation-1: -The cost of equity is higher because there an uncertainty of dividend and repayment of capital. Therefore equities are always considered as higher risk source of fund.
Detailed explanation-2: -Well, the answer is that cost of debt is cheaper than cost of equity. As debt is less risky than equity, the required return needed to compensate the debt investors is less than the required return needed to compensate the equity investors.
Detailed explanation-3: -Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders’ expected returns are lower than those of equity investors (shareholders).
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