The equity capital is cost free. Do you agree? Give reasons.
Answers
It is sometimes argues that the equity capital is free of cost. The reason for such argument is that it is not legally binding for firms to pay dividends to ordinary shareholder. Further, unlike the interest rate or preference dividend rate, the requital to be free of cost. Equity capital involves an opportunity cost; ordinary shareholders supply funds to the firm in the expectation of dives’s the market value of the share in the expectation of dividends and capital gains commensurate with their risk of investment. The market value of the share determined by the demand and supply forces in well fractioning capital market reflects the return required by ordinary, shareholder. Thus, the shareholder’s repaired with the return, which equates the present value of the expected dividends with the market enquiry would, however be more than the shareholder’s market price of the share.
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Answer:
It is sometimes argues that the equity capital is free of cost. The reason for such argument is that it is not legally binding for firms to pay dividends to ordinary shareholder. Further, unlike the interest rate or preference dividend rate, the requital to be free of cost. Equity capital involves an opportunity cost; ordinary shareholders supply funds to the firm in the expectation of dives’s the market value of the share in the expectation of dividends and capital gains commensurate with their risk of investment. The market value of the share determined by the demand and supply forces in well fractioning capital market reflects the return required by ordinary, shareholder. Thus, the shareholder’s repaired with the return, which equates the present value of the expected dividends with the market enquiry would, however be more than the shareholder’s market price of the share.