Debt normally does not cause............
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A dilution of control
Option (1) A dilution of control — Correct. Debt normally does not cause a dilution of control. Lenders do not get voting rights, so the owners keep their control. A public issue of equity may reduce the management’s holding.
Option (2) A dilution of flexibility — Incorrect. The point made about debt and control is not about flexibility.
Option (3) A dilution of cost — Incorrect. Cost is a different factor in choosing between debt and equity. The statement is about control.
Option (4) A dilution of equity — Incorrect. It is new equity shares that dilute control. The statement is about control, not equity.
NCERT (2026-27 Edition): “11. Control: Debt normally does not cause a dilution of control. A public issue of equity may reduce the managements’ holding in the company and make it vulnerable to takeover. This factor also influences the choice between debt and equity especially in companies in which the current holding of management is on a lower side.” |