CFA Level I · CFA Level I Exam · Equity Instrument Features
Which of the following statements best describes a reason a company raises equity rather than debt to finance growth?
Equity financing carries no contractual obligation to pay dividends or repay principal, so it lowers the risk of financial distress and default compared with debt. It does not provide tax-deductible payments and it dilutes existing owners, so the other reasons are wrong.
- AEquity creates no legally required payments, reducing financial distress riskCorrect
- BEquity dividends are always tax deductible for the issuer
- CEquity gives existing owners more control through lower dilution
Explanation
Dividends are discretionary, so equity does not impose fixed obligations that could trigger default. Dividends are generally not tax deductible, and issuing new shares dilutes existing owners' control.
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