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    Question

    For a large infrastructure project, which of the

    following is typically the MOST expensive source of finance?
    A Debentures Correct Answer Incorrect Answer
    B Term Loans from Banks Correct Answer Incorrect Answer
    C Equity Capital Correct Answer Incorrect Answer
    D External Commercial Borrowings (ECB) Correct Answer Incorrect Answer
    E Government Grants Correct Answer Incorrect Answer

    Solution

    Equity capital is the most expensive because equity shareholders bear the highest risk. In case of liquidation, they are paid last. To compensate for this risk, they expect a higher rate of return than debt holders. Furthermore, dividends paid to equity shareholders are not tax-deductible, whereas interest on debt is, making the effective cost of debt lower. Government Grants (E) are the cheapest as they are non-repayable.

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