Question
For a company, the cost of issuing new equity shares is
generally higher than the cost of issuing debt because: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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