Friday, April 6, 2007

Differences between Debt and Equity

I found this article that can help you to understand difference between Debt and Equity.

Debt Equity
Must be repaid or refinanced. Can usually be kept permanently.
Requires regular interest payments. Company must generate cash flow to pay. No payment requirements. May receive dividends, but only out of retained earnings.
Collateral assets must usually be available. No collateral required.
Debt providers are conservative. They cannot share any upside or profits. Therefore, they want to eliminate all possible loss or downside risks. Equity providers are aggressive. They can accept downside risks because they fully share the upside as well.
Interest payments are tax deductible. Dividend payments are not tax deductible.
Debt has little or no impact on control of the company. Equity requires shared control of the company and may impose restrictions.
Debt allows leverage of company profits. Shareholders share the company profits.

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