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Question
Ratan Ltd. needs to raise funds from the financial market and, hence, considers issuing equity shares. State any four reasons to explain why this source of raising funds is considered by the company.
Solution
- No fixed burden: Equity shares do not burden the company as dividends are based on profit availability and board of directors' intentions. The corporation is not required to pay dividends to equity shareholders, even if it is profitable.
- Permanent Capital: Equity share capital is considered long-term or permanent capital because a firm is not compelled to repay it during its lifetime. It is only reimbursed to shareholders when the company is wound up.
- Risk Capital: Equity capital is referred to as risk capital. In difficult times, a corporation can trade on equity to mitigate the risk associated with equity capital.
- No charge on assets: Equity shares do not generate a levy on the company's assets. A firm is free to use its assets to raise financing.
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