Question
Which of the following statements is TRUE about sources of finance used by companies: Interest and dividend payments on debt and equity are tax-deductible. Small and medium-sizes companies cannot easily afford the costs of obtaining a public listing on the Stock Exchange. Share issue (equity) is considered an internal source of finance for the company as the shareholder become owners. Retained earnings are a long-term external source of finance available for the company.
Answer
4.6
(208 Votes)
Wesley
Master · Tutor for 5 years
Answer
"Small and medium sizes companies cannot easily afford the costs of obtaining a public listing on the Stock Exchange." is the only statement that is definitely true, among the given options.
Explanation
## Step 1:Sources of finance can either be internal or external to a company and each source comes with its own terms, conditions and requirements. The statements given each address different parameters about theoretical and practical realities of how companies operate in the financial market.## Step 2:We dissect each provided statement in order to ascertain the objectives within every statement:Statement 1:### The statement - "Interest and dividend payments on debt and equity are tax-deductible." Companies usually receive tax deduction for interests paid on debt, but not on dividends paid out to their shareholders. Thus, the first statement is False.Statement 2:### The statement - "Small and medium sizes companies cannot easily afford the cost of obtaining a public listing on the Stock Exchange."The process to get listed publicly on a stock exchange can indeed be price prohibitive and structurally complicated for smaller medium beat companies and thus second statement holds true. Statement 3:### The statement - "Share issue (equity) is considered an internal source of finance for the company as the shareholders become owners."When a company issues shares, it is generating capital externally though the investment becomes internal as it is allotted to ownership equity. Despite it indirectly contributing as 'ownership,’ the finance involved is typically considered as external itself due to its origins. Financing from within the company does not have to be paid back, removing the need to stipulate any collateral security. Therefore, it's right to consider the third statement is partially true, but it's clarify as "False", because besides the ownership part, the finance source should also be in focus here.Statement 4:### The statement - "Retained earnings are a long-term external source of finance available for the company."Retained earnings are actually internal sources rather than an external source of finance, since these are profits that the company has earned and chosen to put back into the business. They form a readily available resource that the company can draw upon as needed. As such the fourth statement is "False".