CFA Level I · CFA Level I Exam · Equity Instrument Features
Which feature of equity financing most likely makes it a less risky source of capital for the issuing company than debt?
Dividends on equity are discretionary, so the company can reduce or suspend them without defaulting. Debt requires fixed interest and principal payments, and missing them can lead to default or bankruptcy, which makes equity financing less risky for the issuer.
- ADividends are tax deductible for the issuer
- BDividends can be reduced or suspended without causing defaultCorrect
- CEquity holders have a fixed maturity date for repayment
Explanation
Dividends on common equity are discretionary, so the issuer can cut or skip them without triggering default or bankruptcy. Interest on debt is a legal obligation. Dividends are generally not tax deductible, and common equity has no maturity date.
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