Which financing option has the highest overall costs?

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Question:

Which financing option has the highest overall costs?

Answer:

Equity financing has the highest overall cost.


Further Explanation:

The financing options that are available to the company are equity and debt. Equity  Financing refers to the issue of equity shares to the public. Debt refers to the loan taken by the company from the public or any financial institutions. The equity shareholders have the right to vote in general meetings while the debt holder does not have any such rights.

The equity shareholders are also entitled to receive dividends while debt holders are entitled to receive the interest regardless of whether the company is having a profit or not. The interest paid to debt-holders is deducted from the net profit before any tax is charged. The interest reduces the taxable income while the dividend is calculated on net profit after tax. Thus, the cost of using debt finance is lower as the amount which is paid as the interest is charged against the tax.

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Therefore, Equity financing involves a higher cost than Debt financing.

Learn more:

1. Learn more about raising the equity

2. Learn more about the problem related to equity theory

3. Learn more about the short-term financial goals

Answer details:

Grade: Senior School

Subject: Financial Management  

Chapter: Cost of Capital

Keywords: Equity financing, the highest overall cost, debt financing, financing options, capital, business, shareholder’s fund, loan, financial management, raise, issue.

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