Which of the following is an advantage of using equity as a source of funding?
1. It won’t dilute existing shareholder’s value of change ownership percentage.
2. It doesn't have additional financial commitments.
3. It’s very liquid and always accepted.
4. The cost of equity is usually lower than the cost of credit.
Answers
Answer:
It doesn't have additional financial commitments.
Answer:
Advantages of Equity
Less risk: You have less risk with equity financing because you don't have any fixed monthly loan payments to make. This can be particularly helpful with startup businesses that may not have positive cash flows during the early months.
Credit problems: If you have credit problems, equity financing may be the only choice for funds to finance growth. Even if debt financing is offered, the interest rate may be too high and the payments too steep to be acceptable.
Cash flow: Equity financing does not take funds out of the business. Debt loan repayments take funds out of the company's cash flow, reducing the money needed to finance growth.
Long-term planning: Equity investors do not expect to receive an immediate return on their investment. They have a long-term view and also face the possibility of losing their money if the business fails.