If stock markets are bullish, shareholders will earn less.
Fixed operating cost will increase the business risk.
Dividend is tax deductible
Due to weak cash flow position, the firm may not be able to honor fixed cash payment obligations.
Show Solution
The Correct Option isD
Solution and Explanation
Step 1: Spot the clue in the case:
Pick out the weak points of Charvi's firm in the case: heavy fixed costs and thin cash flow. Then see which option ties these to the choice of equity.
Step 2: Recall the related idea:
Money borrowed must be repaid with interest on fixed dates. Money raised from owners need not be returned on fixed dates and dividends are paid only when the firm decides. This is why cash flow matters in choosing the source. Before marking the answer, compare the key phrase of the case with the meaning of each option once more. Words that sound alike can mislead, so match meaning and not sound. Only one option fits both the case and the definition.
Step 3: Test option (A).
A rising market does not reduce what shareholders earn, so the statement is untrue and cannot support equity.
Step 4: Test option (B).
This option states a problem but does not link it to equity. It is a general remark, not the needed reason, so it is not chosen.
Step 5: Test option (C).
Tax relief is given on interest, not on dividend. So this claim is false.
Step 6: Test option (D).
This ties the weak cash flow in the case to the fixed payment burden of debt. Equity avoids that burden, so this is the reason we want.
Final Answer:
Because her cash flow is weak, equity is the safer route, which is option 4.
\[ \boxed{\text{Option 4}} \]
