Explain any two merits and demerit of
issuing equity shares to raise long term finance.
Answers
Merits of Equity Shares=
(i) Long-term and Permanent Capital It is considered as the good source of long-term finance. A company is not required to payback the equity capital during its lifetime. Thus, they are also known as the permanent sources of capital.
(ii) No Fixed Burden Payment of dividend to the equity shareholders is not compulsory. Therefore, there is no burden on the company in this respect. They provide a cushion of safety against unfavorable development.
(iii) Credit Worthiness Issuance of equity share capital creates no change on the assets of the company. A company can raise further finance on the security of its fixed assets.
Demerits of Equity Shares=
(i) Dilution in Control Each sale of equity shares dilutes the voting power of the existing equity shareholders and extends the voting or controlling power to the new shareholders. Equity shares are transferable and may bring about centralization of power in few hands.
(ii) Trading on Equity not Possible If equity shares alone are issued, the company cannot trade on equity.
(iii) Over Capitalization Excessive issue of equity shares may result in over capitalization. Dividend per share is low in that condition which adversely affects the psychology of the investors.