Cost of funds plays an important aspect when raising capital. What are the distinct features that...

Cost of funds plays an important aspect when raising capital. What are the distinct features that separate debt capital from equity capital?

Expert Solution

Cost of funds do plan an important role in the capital being raised by a company. It is ideal to have a mix of debt and equity so that the debt does not eat up the profits of the company in the form of interest.

Some of the differences between equity capital and debt in terms of their features are as follows:

1) The providers of equity capital have voting power in the decision making of the company based on the number of shares held by them whereas providers of debt based capital do not have such voting powers in the decision making of the company.

2) Equity share holders are the oweners of the company while the providers of the debt are outsiders and cannot be recognized as the owners of the company.

3) Lenders of debt are paid in the form of interest whereas the providers of equity based capital are given returns in the form of dividends of the company.

4) Though the company is in losses, it is vital for the company to pay the interest while the dividends may be declared only on the basis of the profits.

5) Debt must be repaid some time or the other, equity may not be repaid till the winding up of the company.

jeff jeffy answered 2 years ago

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