When using equity financing, firms incur a legal obligation to repay the amount of money invested.

Question

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Equity financing involves selling ownership shares in a company to investors. The investors provide capital in exchange for a share of ownership and potential future profits. Unlike with debt financing, there is no legal obligation to repay the invested amount in equity financing. However, the investors do expect to receive a return on their investment through the distribution of dividends or the eventual sale of their ownership shares at a higher price.

When Using Equity Financing, Firms Incur a Legal Obligation to Repay