Answer: the equity holders' required rate of return is based on the future cash flows they expect to receive.

## Explanation **Option C is correct** because when a company issues common shares, equity holders' required rate of return is indeed based on the future cash flows they expect to receive. This is a fundamental principle of equity valuation. **Why Option A is incorrect**: Companies are not obligated to make dividend payments to common shareholders. Dividend payments are discretionary and depend on the company's financial performance, cash flow position, and board decisions. Common shareholders have no legal right to demand dividends. **Why Option B is incorrect**: Future cash flows to equity holders are neither known nor certain. Unlike debt holders who receive fixed interest payments, equity holders' returns depend on the company's future performance, which is uncertain. Common shareholders receive dividends only if declared by the board and participate in residual value through capital appreciation. **Why Option C is correct**: Equity holders' required rate of return (cost of equity) is determined by the expected future cash flows from dividends and capital appreciation. This is typically calculated using models like the Dividend Discount Model (DDM) or Capital Asset Pricing Model (CAPM), both of which are based on expected future cash flows and their associated risks. **Key Concepts**: - Common equity represents ownership with residual claims - Dividend payments are discretionary - Equity returns are uncertain and based on expectations - Required return reflects risk and expected future cash flows

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