Question

    The cost of equity share capital is greater than the

    cost of debt because_________.
    A The face value of equity shares is lower than the face values of debentures in most cases Correct Answer Incorrect Answer
    B Equity shares do not provide a fixed dividend rate Correct Answer Incorrect Answer
    C Equity shares carry a higher risk than debts Correct Answer Incorrect Answer
    D Equity shares are not easily saleable Correct Answer Incorrect Answer
    E The cost of equity is generally fixed and does not vary over time Correct Answer Incorrect Answer

    Solution

    Equity shares represent ownership in a company and provide shareholders with a claim on the company's earnings and assets. Unlike debt, equity does not have a fixed repayment schedule, and shareholders are not guaranteed a return on their investment. As a result, equity is generally considered riskier than debt. The cost of equity capital reflects the return that investors require to compensate them for the risk they are taking by investing in the company's stock.

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