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.
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The Correct Option isD
Solution and Explanation
Step 1: Understanding the Question:
The question asks for the reason that supports raising money through equity for Charvi's firm. The case tells us her business has high fixed operating costs and weak cash flow.
Step 2: Key Concept:
Debt carries fixed interest and repayment, which must be paid even in bad times. Equity has no fixed payment. So a firm with weak cash flow finds equity safer. Cash flow position is a factor affecting the choice of capital structure.
Step 3: Check option (A).
A bullish market is when share prices are rising, and shareholders then earn more, not less. The statement is also not a reason to choose equity. So (A) is wrong.
Step 4: Check option (B).
High fixed operating cost raises business risk, but this alone does not make equity a better source. It is a general remark and not the best reason here. So (B) is not the answer.
Step 5: Check option (C).
Dividend is paid out of profit after tax and is not tax deductible. Interest is the tax deductible item. So (C) is factually wrong.
Step 6: Check option (D).
With weak cash flow the firm may fail to meet fixed payments such as interest and loan repayment. Equity does not need such payments, so this is the right reason. So (D) is right.
Final Answer:
Weak cash flow makes fixed debt payments risky, so equity is preferred. The answer is option 4.
\[ \boxed{\text{Option 4}} \]
