Equity capital is considered more expensive than debt capital because *

Dividends on equity capital normally does not have tax shield

Dividends on equity capital may not be declared given an insufficient corporate earnings

 

Interests on debt capital may not be paid given an insufficient corporate earnings

 

Interests on debt capital are paid uniformly each year based on a fixed amount even in the case of large corporate earnings

 

(Question) Equity capital is considered more expensive than debt capital because?

Answer: Letter D

a. Dividends on equity capital normally does not have tax shield

b. Dividends on equity capital may not be declared given an insufficient corporate earnings

c. Interests on debt capital may not be paid given an insufficient corporate earnings

d. Interests on debt capital are paid uniformly each year based on a fixed amount even in the case of large corporate earnings

Typically, the cost of equity exceeds the cost of debt because of the rule that even though the corporation have a large corporate earning, interests on debt capital are paid uniformly each year based on a fixed amount. The risk to shareholders is greater than to lenders since payment on a debt is required by law regardless of a company's profit margins. Because equity capital typically comes from funds invested by shareholders, the cost of equity capital is slightly more complex. Equity funds don't require a business to take out debt which means it doesn't need to be repaid. But there is some degree of return on investment shareholders can reasonably expect based on market performance in general and the volatility of the stock in question.