Discuss the importance of equity capital to business. Your discussion may include the Modigliani and Miller's Theorem on capital structure and the factors that influence the capital structure of a company
The capital for a company form of organisation is normally raised by issuing equity/ordinary shares and / or debt securities to the public at large.
This capital need not be paid back to the investors as long as the company is in existence. Thus, equity source is the least risky source of fund from the view point of borrower. At the same time, when the company makes huge profit, the profit left after meeting all obligations might be distributed among the equity shareholders, and this is the most appealing factor of equity capital. That does not mean that company has to distribute capital whenever it makes residual profit (profit left after making all other payments). The decision to distribute or not to distribute divisible profit is ultimately taken by the Board of Directors. The return to ordinary shareholders (dividend/cost to the company) is paid after meeting all payments like dividend to preference share holders and interest payments to debenture holders and other long term suppliers of funds.
Financial needs are continuous for any growing firm. As the needs for expansion and diversification enhances these days. This capital can come from debt or equity. When companies can finance themselves with either debt or equity, certain questions arise. ...