One reason why ABC may prefer share capital to loan capital?

One reason why ABC may prefer share capital to loan capital?

• A. Share capital does not require interest payments
• B. Share capital is risk-free
• C. Loans have no risks
• D. Loans always cheaper

Answer: (A)

The main idea here is how funding choices affect fixed financial obligations. Equity funding doesn’t require regular interest payments, unlike debt. A loan comes with fixed interest that must be paid regardless of how the business performs, which can strain cash flow and raise the risk of insolvency during tough times. By using share capital, ABC preserves cash, avoids mandatory payments, and reduces financial risk, even though dividends to shareholders aren’t guaranteed. The other statements aren’t correct because share capital is not risk-free (owners bear risk), loans do carry risks (default, covenants, interest rate changes), and whether loans are cheaper depends on rates and tax considerations, not always.

The main idea here is how funding choices affect fixed financial obligations. Equity funding doesn’t require regular interest payments, unlike debt. A loan comes with fixed interest that must be paid regardless of how the business performs, which can strain cash flow and raise the risk of insolvency during tough times. By using share capital, ABC preserves cash, avoids mandatory payments, and reduces financial risk, even though dividends to shareholders aren’t guaranteed. The other statements aren’t correct because share capital is not risk-free (owners bear risk), loans do carry risks (default, covenants, interest rate changes), and whether loans are cheaper depends on rates and tax considerations, not always.