Question

Explain the conflict between inside and outside equity, and show how increasing the share of
outside equity imposes rising costs of financing investments.(would appreciate if you can post answers by writing down the words on web page instead of pictures in case i cannot look clearly of each words)

Answer 1

Inside Equity: Refers to the raising of equity or the capital for the company from the inside sources i.e. available assets, and liabilities, retained earnings, etc. Whereas Outside equity refers to raising of capital by the company from the outside sources like loans from external institutions, buying of shares, bonds, debentures etc.

Raising funds through the outside sources imposes high costs of Financing investments because such outside sources charge interests from the company, which enhances its cost. And hence the high cost of raising the fund is then transferred to further investment programs which also is at a high cost, in comparison to the internal sources which raises the fund at minimal or no rate of interest.