(a) Since common shares have no maturity date, the company has no liability for cash outflow associated with the redemption of common shares. It is therefore a permanent capital which is available for the firm's use as long as the firm remains a going concern.

(b) The issue of common shares increases the company's financial base and thus its borrowing limit increases since lenders usually provide capital in proportion to the company's equity.

(c) A company is not legally obliged to pay dividend and therefore in times of financial difficulties, it can reduce or suspend common dividends.


a) Common shares have a higher cost because:

 i. Dividend is not tax deductible as is debt interest

ii. Floatation costs on equity are higher than on debt

iii. Common shares are more risky from the investors point of view due to uncertainty regarding dividends and capital gain. They therefore require a higher rate of return

 (b) The issue of new shares dilutes the shareholders earning per share usually because profit does not increase immediately in proportion to the increase in the number of common shares.

(c) The issue also dilutes the ownership and control of existing shareholders.