What best defines equity capital?

• A. Funds borrowed from financial institutions
• B. Money raised through the issuance of shares
• C. Capital generated from selling assets
• D. A reserve of cash held by a corporation

Answer: (B)

Equity capital is best defined as money raised through the issuance of shares. This refers to funds that a company obtains from investors in exchange for ownership stakes in the business, represented by shares of stock. When a company issues new shares, it allows investors to buy a piece of the company, thereby providing the company with capital that can be used for various purposes such as expansion, research and development, or paying off debt.

This form of capital is important because it does not need to be repaid like debt does, and it often comes with the benefit of shareholder support. Investors who buy shares are hopeful that the company will grow, increasing the value of their investment over time. In contrast, the other options presented do not align with the concept of equity capital; for example, borrowed funds from financial institutions represent debt, while selling assets indicates liquidation of resources rather than raising new capital through equity. A reserve of cash is merely a liquidity position and does not represent the influx of capital that equity financing provides.