Question
For a large infrastructure project, which of the
following is typically the MOST expensive source of finance?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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