Answer (B) is correct . Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed.
Answer (A) is incorrect because The obligation to repay at a specific maturity date reduces the risk to investors and thus the required return.
Answer (C) is incorrect because The demand for equity capital is directly related to its greater cost to the issuer.
Answer (D) is incorrect because Dividends are based on managerial discretion and may rarely change; interest rates, however, fluctuate daily based upon market conditions.
