Question
Which of the following features makes equity a desirable source of finance for companies: Share issue is relatively cheaper than debt as investing in shares is less risky than lending. Companies may face legal action if they fail to make regular dividend payments to shareholders. Dividends on equity are tax-deductible. The capital raised through equity does not have to be paid back by the company.
Answer
4
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Zach
Professional · Tutor for 6 years
Answer
Option D - "The capital raised through equity does not have to be paid back by the company".
Explanation
## Step 1: To answer this question, let us go through each of the point to identify the one that makes equity a desirable source for companies.## Step 2: The first point that suggests share issue being relatively cheaper than debt as investing in shares is less risky may not be essentially accurate because risk level associated with share investing is largely dependent on multitude factors and not solely reliant on the mode of financing. ## Step 3: The second point about legal action instigated by regular fails in making dividend payments to shareholders depicts a downside rather than a feature desirable for companies. ## Step 4: Moving on to the third point, dividends on equity are not often tax-deductible therefore making it outmoded as a good option representable for companies. ## Step 5: Lastly, the fourth statement, "The capital raised through equity does not have to be paid back by the company" explains a major advantage of equity financing for companies presenting that neither the principle nor the interest are bound to pay off once it is raised from finance.