Homework Answers
It is safer for a company to issue equity than debt; It is riskier for an investor to buy equity in a company than debt in the same firm. (b)
- If the company issues debt, it must pay fixed interest on the debt irrespective of the profit earned by the company. This fixed expense poses a risk to the company. Also, the company should repay the debt.
- Equity finance does not have a fixed burden on the company.
- From an investor's angle, debt offers a consistent return and is less risky. Equity investment is risky and may provide higher returns.
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