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The Kaplan study text (pg 11) reads:
Equity investors (ordinary shareholders) – within any economic system, the equity investors provide the risk finance. There is a very strong argument for maximizing the wealth of equity investors. In order to attract funds, the company has to compete with risk-free opportunities, e.g. government securities.
“The attraction is the accrual of any surplus earned by the business to the equity investors.”In effect, this is the risk premium (the reward to the equity investors for taking on the risk of investing in the company rather than in safer investments), which is essential for the allocation of resources to relatively risky investments, such as company shares.
QUERY: What does this line mean: “The attraction is the accrual of any surplus earned by the business to the equity investors?”
The attraction is the accrual of any surplus earned by the business to the equity investors:
This means that equity investors are attracted to invest in a company because they have the opportunity to receive any excess profits or surplus earned by the business.
This refers to the potential for equity investors to benefit from capital growth or enhanced dividends once the investment in the company becomes successful. It implies that equity investors are motivated by the potential financial gains they can receive from their investment in the company.
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