Question

Explain the advantages of equity shares as a source of long-term finance.

Answer 1

1. Permanent Capital: Equity shareholders provide the permanent funds of a company. There is no obligation to return the money except at the time of winding up the company.
2. No Obligation as to Dividend: Equity shares do not impose an obligation to pay a fixed dividend. Dividends are payable only if the company has adequate profits. Equity shareholders stand by the company through thick and thin.
3. No Charge on Assets: For issuing equity shares, the company is not required to mortgage or pledge its assets. The assets remain free of charge for borrowing money in the future.
4. Source of Prestige: A company with substantial equity capital has a high credit standing. Creditors readily lend money to it because they regard equity capital as a safety shield.
5. Small Denomination: The nominal or face value of an equity share is generally quite low, such as Rs. 10. Therefore, equity shares have a wide appeal. The company can mobilise huge funds from investors belonging to different income groups.
6. Suitable for Adventurous Investors: Equity shares are the ideal investment for bold and enterprising investors. They receive dividends, and the value of their holdings appreciates during boom periods. In addition, they enjoy full voting power in the company's management. They also have the preemptive right to buy new shares. The company has to first offer its new shares to the existing shareholders in proportion to their existing holdings.