Question

why is common stock financing lower risk to the firm than financing with bonds? group of answer choices the lack of a fixed dividend provides the firm greater flexibility versus the interest cost of a bond. common stock requires the firm to make fixed interest payments to shareholders. although common stock dividends are typically fixed, they are usually lower than the interest on bonds. there is no legal obligation for the firm to pay dividends to its shareholders. the sinking fund feature on common stock lowers its risk. common stock typically has a shorter maturity than bonds.

Answer 1

Common stock financing is lower risk to the firm than financing with bonds due to greater flexibility, no legal obligation for fixed dividend payments, and shorter maturity compared to bonds.

Step-by-step explanation:

Common stock financing is generally considered lower risk to the firm than financing with bonds due to several factors:

1. The lack of a fixed dividend provides the firm greater flexibility compared to the interest cost of a bond. With common stock, there is no obligation to make fixed interest payments to shareholders.
2. There is no legal obligation for the firm to pay dividends to its shareholders. While common stock dividends are typically fixed, they are usually lower than the interest on bonds.
3. Common stock typically has a shorter maturity than bonds. Bonds have a fixed maturity date, while common stock does not have a maturity date.