Question

Cost of equity share capital is more than cost of debt because _________________.

• A. face value of debentures is more than face value of shares
• B. equity shares have higher risk than debt
• C. equity shares are easily saleable
• D. All of the above

Answer 1

The correct option is B equity shares have higher risk than debt

It is usually assumed that cost of equity share capital is higher than the cost of debt because debt is secured against the securities and having a fixed return as interest resulting less risk.

The cost of equity is higher because there is an uncertainty of dividend and repayment of capital. Therefore, equities are always considered as higher risk source of fund.