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1. Cost – shares have a higher cost i.e. dividends are not tax deductable as are
interest payments and flotation of costs on ordinary shares are higher than
those on debt.
2. Risk – ordinary shares are riskier from investor's point of view as there is
uncertainty regarding dividend and capital gains. They therefore require a
relatively higher rate of return. This makes equity capital as the highest cost
source of finance.
3. Earnings dilution – the issue of new ordinary shares dilutes the existing
shareholders earnings per share if the profits do not increase immediately in
proportion to the increase in the number of ordinary shares.
4. Ownership dilution – the issuance of new ordinary shares may dilute the
ownership and control of the existing shareholders. While the shareholders have
a pre-emptive right to retain their proportionate ownership, they may not have
funds to invest in additional shares.
5. The issue of ordinary share capital means that the company’s secrets will be exposed to the public through published statements which may be dangerous from competitors point of view.
NatalieR answered the question on February 9, 2022 at 07:52