Busıness Fınance Iı Deneme Sınavı Sorusu #1008454
What is differency between debt and equity?
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Debt is an ownership interest, equity represents an ownership of company. |
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The corporation’s payment of interest on debt is considered a cost of doing business but is not fully tax deductible. |
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One of the costs of issuing debt represents the possibility of financial success. |
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Equity can be in the form of term loans, debentures, and bonds, but dept can be in the form of shares and stock. |
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Debt holders are the creditors, whereas equityholders are the owners of the company. |
The main differences between debt and equity are the following:
• Debt is not an ownership interest in the firm. Creditors do not generally have votingpower.
• The corporation’s payment of interest ondebt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible.
• Unpaid debt is a liability of the firm. If itis not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.
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