Question
Question 2 Which of the following features makes equity a desirable source of finance for companies: The capital raised through equity does not have to be paid back by the company. Dividends on equity are tax-deductible. Companies may face legal action if they fail to make regular dividend payments to shareholders. Share issue is relatively cheaper than debt as investing in shares is less risky than lending.
Answer
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Flynn
Master · Tutor for 5 years
Answer
The capital raised through equity does not have to be paid back by the company.
Explanation
## Step1: Understanding the features of equity as a mode of finance. Equity is a method of fundraising wherein a company sells shares of the company's ownership in exchange for funds. Unlike debts, the capital raised from equity does not necessarily have to be returned. Payment on dividends tend to remain at the discretion of the company, reducing risks of legal intervention towards enforcing regular payments. It is typically regarded less risky for investors thus influencing decisions during capital deployment. ## Step2: Examining each choice given for this question. The first choice clearly states a favorable aspect of equity financing where the raised capital need not be repaid necessarily by the business. Dividends on equity usually are not tax deductible which cancels out the second option as an advantage of equity financing. As discussed above, companies may choose not to pay dividends, ruling out the third choice. The fourth statement is objectively untrue as the risks entails in capital loaning and investing in shares is principally different and cannot be determined comparatively without further specifics.## Step3: After crossing out the clearly false alternatives, the correct choice best responding to the question would be the one remaining.