What are the characteristics of equity shares ? What are the advantages of issuing equity shares to raise long-term finance ? (Imp)

Solution

Characteristics of equity shares are as follows :

1. Equity shareholders have a residual claim in the firm. In other words, the income left after satisfying the claims of all creditors, outsiders, and preference shareholders, belongs to equity shareholders.

2. Equity shareholders are likely to enjoy a higher profit as well as increase in the value of the shares.

3. Equity share capital is the basis on which loans can be raised. It provides credibility to the company and confidence to the loan providers.

4. Since equity share holders have the right to vote for the election of the board of directors they ensure that the company is managed in the best interests of the shareholders.
Advantages :

1. It is a source of permanent capital without any commitment of a fixed return to the shareholders. The return on capital depends ultimately on the profitability of business.

2. It facilitates a higher rate of return to be earned with the help of borrowing funds because loans carry a fixed rate of interest. Hence, equity shareholders are likely to enjoy a higher rate of return based on profitability.
3. It is on the basis of equity share capital that loans can be raised. Equity provides the credibility to the company and confidence to the prospective loan provider.

4. Democratic control over management of the company is assured due to the voting rights of equity shareholders.

Some More Questions From Sources of Business Finance Chapter

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Sources Of Business Finance

What are the characteristics of equity shares ? What are the advantages of issuing equity shares to raise long-term finance ? (Imp)

Some More Questions From Sources of Business Finance Chapter

Give types of working capital.

Give meaning of owner’s capital.

Give meaning of borrowed capital.

Give meaning of long-term finance.

Give meaning of medium-term finance.

Give meaning of short-term finance.

Define shares.

Give the types of shares.

Define preference shares.

Give meaning of equity share.

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