UrbanPro

Take Class 12 Tuition from the Best Tutors

  • Affordable fees
  • 1-1 or Group class
  • Flexible Timings
  • Verified Tutors

Search in

Cost of debt is lower than the cost of Equity share capital. Give full explanation why even then a company cannot work only with the debt?

Asked by Last Modified  

Follow 7
Answer

Please enter your answer

Tutor

Cost in this context refers to the cost of obtaining capital. In the case of debt, the cost is interest whereas in the case of equity share capital, it is the share in the profits of the company. Suppose, a company has a profit of Rs 6,00,000 and Equity capital of Rs 50,00,000, requires funds has to...
read more

Cost in this context refers to the cost of obtaining capital. In the case of debt, the cost is interest whereas in the case of equity share capital, it is the share in the profits of the company. Suppose, a company has a profit of Rs 6,00,000 and Equity capital of Rs 50,00,000, requires funds has to choose between taking a debt of Rs 10,00,000 carrying interest at 10% or giving out a equity stake of 20%. If the debt option is chosen, the cost of the debt will be 10% of Rs 10,00,000 which is 1,00,000 and that leaves Rs 5,00,000 to the equity shareholder. If the equity financing choice is opted then new shareholder will get 20% of the profits which is Rs1,20,000 which is clearly higher than the cost of the debt. Additionally, interest on debt is a tax deductible expense, whereas, dividend paid to shareholders is charged under corporate tax. A company cannot work only with debt because of the risk that a company may fail to generate enough cash flows to pay interest and repay debt.

read less
1 Comments

Author, Teacher & Learner for Commerce and Management subjects

When cost of debt is lower than the cost of equity, it will decrease the profit available to equity holder as the firm can not only rely only on debt capital it will increase the obligation in terms of interest that is to be paid when firm has no profitability situation so it would be better to use both...
read more
When cost of debt is lower than the cost of equity, it will decrease the profit available to equity holder as the firm can not only rely only on debt capital it will increase the obligation in terms of interest that is to be paid when firm has no profitability situation so it would be better to use both sources of finance instead of debt only. read less
Comments

Tutor

Cost in this context refers to the cost of obtaining capital. In the case of debt, the cost is interest whereas in the case of equity share capital, it is the share in the profits of the company. Suppose, a company has a profit of Rs 6,00,000 and Equity capital of Rs 50,00,000, requires funds has to...
read more
Cost in this context refers to the cost of obtaining capital. In the case of debt, the cost is interest whereas in the case of equity share capital, it is the share in the profits of the company. Suppose, a company has a profit of Rs 6,00,000 and Equity capital of Rs 50,00,000, requires funds has to choose between taking a debt of Rs 10,00,000 carrying interest at 10% or giving out a equity stake of 20%. If the debt option is chosen, the cost of the debt will be 10% of Rs 10,00,000 which is 1,00,000 and that leaves Rs 5,00,000 to the equity shareholder. If the equity financing choice is opted then new shareholder will get 20% of the profits which is Rs1,20,000 which is clearly higher than the cost of the debt. Additionally, interest on debt is a tax deductible expense, whereas, dividend paid to shareholders is charged under corporate tax. A company cannot work only with debt because of the risk that a company may fail to generate enough cash flows to pay interest and repay debt. read less
Comments

View 1 more Answers

Related Questions

Explain the term "Training". Why is training needed in an organisation? Give any three reasons.
Training is requires knowledge that must be given to fresher and experienced person or employees in order to further increase their skill and efficiency so that they can work more skillful manner.
Hardik
0 0
6

Now ask question in any of the 1000+ Categories, and get Answers from Tutors and Trainers on UrbanPro.com

Ask a Question

Related Lessons

notes on all the process related questions in Bst class 12 CBSE
PROCESS RELATED QUESTIONS Planning Process Setting Objectives: The first step is setting objectives for the entire organisation and each department or unit within the organisation. Developing Premises:...

Management as an art and science
Art is something creative , something that come from personalised application , varies from person to person because they apply their personalised experience, practice and creativity . Science is something...

Recommended Articles

Swati is a renowned Hindi tutor with 7 years of experience in teaching. She conducts classes for various students ranging from class 6- class 12 and also BA students. Having pursued her education at Madras University where she did her Masters in Hindi, Swati knows her way around students. She believes that each student...

Read full article >

Radhe Shyam is a highly skilled accounts and finance trainer with 8 years of experience in teaching. Accounting is challenging for many students and that’s where Radhe Shyam’s expertise comes into play. He helps his students not only in understanding the subject but also advises them on how to overcome the fear of accounts...

Read full article >

Raghunandan is a passionate teacher with a decade of teaching experience. Being a skilled trainer with extensive knowledge, he provides high-quality BTech, Class 10 and Class 12 tuition classes. His methods of teaching with real-time examples makes difficult topics simple to understand. He explains every concept in-detail...

Read full article >

Mohammad Wazid is a certified professional tutor for class 11 students. He has 6 years of teaching experience which he couples with an energetic attitude and a vision of making any subject easy for the students. Over the years he has developed skills with a capability of understanding the requirements of the students. This...

Read full article >

Looking for Class 12 Tuition ?

Learn from the Best Tutors on UrbanPro

Are you a Tutor or Training Institute?

Join UrbanPro Today to find students near you
X

Looking for Class 12 Tuition Classes?

The best tutors for Class 12 Tuition Classes are on UrbanPro

  • Select the best Tutor
  • Book & Attend a Free Demo
  • Pay and start Learning

Take Class 12 Tuition with the Best Tutors

The best Tutors for Class 12 Tuition Classes are on UrbanPro

This website uses cookies

We use cookies to improve user experience. Choose what cookies you allow us to use. You can read more about our Cookie Policy in our Privacy Policy

Accept All
Decline All

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 55 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 7.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more