Which of the following sources of capital should not be selected by a business in case its earnings are not consistent?

Debentures

The correct answer is option 3- Debentures.

Debentures represent a fixed obligation to pay interest and repay principal, regardless of the company's profitability. If a business has inconsistent earnings, paying fixed interest on debentures can strain its financial resources, especially during periods of low income. Therefore, debentures are generally not recommended if a company's earnings are unpredictable or volatile, as the company may struggle to meet these fixed commitments during tough times. Thus, debentures are the source of capital that should generally be avoided in situations where earnings are not consistent.

* Equity shares are typically suitable for businesses with inconsistent earnings. Since dividend payments to equity shareholders are not fixed, they are paid only when the company is profitable. Therefore, equity shares provide flexibility and do not impose a financial burden when earnings are low.

* Preference shares also provide fixed dividends, but these dividends are generally paid before equity dividends. While preference shareholders have a fixed claim on dividends, the company can sometimes defer these payments in case of financial difficulties, although this could affect the company's reputation and relationships with investors.