Because issuing common equity entails less risk to the firm, it is always less expensive than borrowing.

Question

Quizplus · Accepted Answer

This statement is false. Issuing common equity may be more expensive than borrowing because equity investors expect a higher return on investment to compensate for the greater risk they are taking by investing in the company. Additionally, issuing equity can dilute the ownership of existing shareholders, which may also affect the cost of equity capital for the company.

Because Issuing Common Equity Entails Less Risk to the Firm