Question

An advantage of financing through an issue of ordinary shares rather than with borrowing is:

A)        it does not require a fixed periodic repayment.

B)        it involves lower transaction costs.

C)        it does not dilute proportional ownership.

D)        All of the above are advantages.

Answer 1

Option a) is correct it does not require a fixed periodic payment because dividend payments are at the discretion of the company and are obliged to pay periodic dividends.
Option b) is incorrect because issue of shares is through transaction costs like brokerage, securities transaction tax, legal fees, underwriting fees etc. which is high. Historically transaction cost of equity is higher than issuing debt.
Option c) is incorrect because since the number of shares is increased it increases dilution and decreases the value per share

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