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    Question

    For a company, the cost of issuing new equity shares is

    generally higher than the cost of issuing debt because:
    A Underwriting costs for equity are lower. Correct Answer Incorrect Answer
    B Flotation costs for equity are higher and dividends are not tax-deductible. Correct Answer Incorrect Answer
    C Interest payments are mandatory, while dividends are not. Correct Answer Incorrect Answer
    D Equity shares have a fixed maturity date. Correct Answer Incorrect Answer

    Solution

    Flotation costs (underwriting, legal, brokerage fees) are typically higher for equity issues than for debt. More importantly, dividend payments to shareholders are made from after-tax profits and are not tax-deductible for the company, whereas interest on debt is a tax-deductible expense, lowering the effective cost of debt.

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