Identify the correct statements in context of equity financing.

A. Borrowing limit increases as a consequence of increase in number of shares.
B. Ordinary shares are generally not redeemable.
C. Issue of new shares dilutes the EPS if the profits do not increase immediately in proportion to increase in number of shares.
D. A company is not legally obliged to pay dividend.
E. Ordinary shares are less riskier from investor’s perspective.

Choose the correct answer from the options given below:

Correct option is B

A. Borrowing limit increases as a consequence of increase in number of shares: 

Issuing more shares increases the equity base of the company, improving the debt-equity ratio, which makes the company appear more financially stable to lenders. This may enhance its borrowing capacity as lenders prefer funding companies with a stronger equity cushion.

B. Ordinary shares are generally not redeemable: Ordinary (equity) shares are permanent capital and do not have a redemption feature unless specifically bought back by the company. They remain in the company until liquidation or buyback.

C. Issue of new shares dilutes EPS if the profits do not increase immediately in proportion: EPS = Earnings / Number of shares. When new shares are issued but earnings remain the same or grow slowly, the EPS falls, resulting in dilution of shareholder earnings.

D. A company is not legally obliged to pay dividend: Unlike interest on debt or dividends on preference shares (which may be cumulative), dividend payment to equity shareholders is discretionary. Management may choose to retain profits for reinvestment or other needs.

Information Booster:

• Equity financing means raising capital through issuing shares, not borrowing.

• It enhances the company’s balance sheet by adding to the shareholders’ funds, improving its leverage ratios.

• Shareholders receive ownership rights, such as voting and a share in residual profits.

• It is a non-repayable source of capital, reducing fixed financial obligations.

• EPS dilution is a significant concern when issuing new equity, especially in the short term.

• Companies use equity financing to fund expansion, repay debt, or strengthen capital base.

• Equity financing signals long-term confidence, though it can impact control and earnings per share.

Additional Knowledge:

​E. Ordinary shares are less riskier from investor’s perspective: Equity shares are actually more risky than debt or preference shares. Equity shareholders are last in line to be paid in case of liquidation, and dividends are not guaranteed. The return depends on the company’s profitability and board decisions, making it a high-risk, high-return investment.​