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Demerits

The disadvantages of equity capital from the viewpoint of a company are: (i) High cost funds reflecting the high required rate of return of investors as a compensation for higher risk as the fact that equity dividends are not tax-deductible payments. They are paid out of post-tax fits; (ii) High flotation cost in terms of underwriting, brokerage and other issue expenses pared to other securities; (iii) Dilution of control of existing shareholders on sale of new shares outsiders/public. The disadvantages associated with equity capital for the shareholders are: The equity capital is in reality risk capital as it ranks the last as a claimant to income as well as assets of the company. (iv) The scattered and unorganized shareholders are unable to exercise  active and real cannot over the company. (v) The shareholders cannot claim dividend as a right. (vi) There is a wide fluctuation in share prices with attendant risk for the investors. In brief, equity capital is a high risk-high reward permanent source of long-term finance for rate enterprises. The shareholders who desire to share the risk, return and control associated ownership of companies would invest in corporate equity. M a source of long-term fund, it high cost, low/nil risk, does not dilute control and puts no restraint on managerial freedom.

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