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Question
Discuss the importance of equity shares as sources of long-term finance.
Solution
- The holders of equity shares are the main risk bearers. They provide risk capital because when the company fails and is closed, equity shareholders may lose their entire investment.
- Equity shareholders are likely to enjoy a higher return and a considerable increase in the value of their shares.
- Equity shareholders have a residual claim in the company. The income left after payment of interest to creditors and dividends to preference shareholders belongs to equity shareholders.
- Equity share capital improves the credit worthiness of the company and the confidence of the creditors. It is the basis on which loans can be raised.
- Equity shareholders have the right to elect directors. They can collectively ensure that the company is managed in their best interests.
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