Why would you raise equity versus debt?

• A. Equity is less risky than debt because you don't have to repay it and it can bring in new investors; debt offers tax-deductible interest and no ownership transfer.
• B. Debt has higher risk because you must repay it with interest, while equity never requires repayment.
• C. Equity always costs the company less than debt.
• D. Debt provides voting rights to lenders and collateral-free financing.

Answer: (A)

Financing choice hinges on cash-flow risk and ownership impact. Equity is attractive because there’s no required repayment, so it reduces near-term financial stress and frees up cash flow. It also brings in new investors who can provide capital and potentially strategic value. That makes equity feel less risky from the company’s ongoing cash-flow perspective.

Debt, on the other hand, can lower after-tax costs through the interest tax shield, since interest payments are deductible, and it doesn’t dilute ownership. But it imposes regular principal and interest obligations, increasing financial risk if cash flows weaken. So the best answer emphasizes that equity lowers mandatory payments and can add investors, while debt offers a tax advantage and preserves ownership, helping explain why a firm might choose one path over the other depending on goals and risk tolerance.