Equity shares are not easily saleable
Equity shares do not provide the fixed dividend rate
Generally the face value of equity shares is less than the face value of debentures
Equity shares have high risk than debts
Answer is Right!
Answer is Wrong!
The correct answer is D. Equity shares have high risk than debts.
Equity shares are riskier than debt because they represent ownership in a company. If the company does poorly, the value of equity shares can decline significantly. Debt, on the other hand, is a loan that must be repaid, regardless of the company’s performance. As a result, lenders are willing to accept a lower return on debt than investors are willing to accept on equity shares.
Here is a brief explanation of each option:
- Option A: Equity shares are not easily saleable. This is not the main reason why the cost of equity is higher than the cost of debt. Equity shares can be sold on the stock market, but they may not be as easy to sell as debt, which can be sold to a bank or other lender.
- Option B: Equity shares do not provide the fixed dividend rate. This is also not the main reason why the cost of equity is higher than the cost of debt. Equity shares do not have a fixed dividend rate, but they can be expected to pay dividends that are higher than the interest rate on debt.
- Option C: Generally the face value of equity shares is less than the face value of debentures. This is not the main reason why the cost of equity is higher than the cost of debt. The face value of a security is the amount that must be repaid at maturity. The face value of equity shares and debentures can be the same or different.
In conclusion, the main reason why the cost of equity is higher than the cost of debt is because equity shares are riskier than debt.