Question

a. Why are equity shareholders called residual claimants? Explain with reasons b. Why is debt capital considered the cheapest source of funds? Explain with reasons.

Answer 1

a. Equity shareholders are called residual claimants because they are paid off at last when every other liability is paid off.

At the time of winding up of a company the realisation amount from the assets will be used to pay off other liabilities first. Equity shareholders are the very last in the list. Although they get everything that is left (more or less than they own)

B. 1. They have lower rate of interest generally

2. Insurance cost is also less as compared to other fund sources.

3. They also have tax advantages as the interest payable on them is tax deductible.

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