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DEMERITS OF EQUITY SHARES

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 asked

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

Cost. The cost of equity capital is high, usually the highest. The rate of return required by equity shareholders is generally higher, than the rate of return required by other investors. While the cost of debt and preference can be determined fairly easily, the cost of equity capital is rather difficult to estimate. Cost of equity capital is highest because of two reasons : • Dividends paid by the firm to equity shareholders are not tax deductible as are interest payments. • Floatation cost on equity shares are higher than those of debts. Underwriting commission, brokerage costs, and other issue expenses are higher for equity issues. (ii) Risk. As already explained, equity shareholders are the last to be paid, for payment of divided during the life time of the company and payment of capital at the event of liquidation of the company. As a result, they are facing the maximum risk from investor’s point of view.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

> DISADVANTAGES OF EQUITY SHARES **(i) Cost.** The cost of equity capital is high, usually the highest. The rate of return required by equity shareholders is generally higher, than the rate of return required by other investors. While the cost of debt and preference can be determined fairly easily, the cost of equity capital is rather difficult to estimate. Cost of equity capital is highest because of two reasons : • Dividends paid by the firm to equity shareholders are not tax deductible as are interest payments. • Floatation cost on equity shares are higher than those of debts. Underwriting commission, brokerage costs, and other issue expenses are higher for equity issues. **(ii) Risk.** As already explained, equity shareholders are the last to be paid, for payment of divided during the life time of the company and payment of capital at the event of liquidation of the company. As a result, they are facing the maximum risk from investor’s point of view. **(iii) Earnings Dilution.** Whenever new equity shares are issued, it dilutes the existing shareholders’ earnings per share (EPS) if the profits don’t increase immediately in proportion to the increase in the number of equity shares. **(iv) Product Ownership Dilution.** Whenever new equity shares are to be issued, these are first offered to the existing shareholders because Companies Act gives them a pre-emptive right to retain their proportionate ownership. This right is called right snares. But if existing shareholders don’t have funds to invest in additional shares, the issue of new share will reduce the ownership and control of the existing shareholders. The ownership may change hands which assumes great significance specially in case of closely held companies.

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 answered

**DEMERITS OF EQUITY SHARES** Hi, 1--When the company issues only one class of shares i.e only equity shares,it may not derive the benefit of trading on equity. 2--As the equity shares have proportionate voting rights management may misuse the proxy right. 3--The equity shares are non-returnable so there are chances that management may issue more shares than the actual need. 4--Shares out of new issues have to be offered on priority basis. Thus, the existing shareholders will get shares. This will lead to concentration of company control in few hands. 5--When dividends are paid in excess the market price of shares goes up. it results in speculation. Thanks

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