What is the difference between equity and debt ?

The difference between equity and debt are:

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  • Debt investors are entitled to a contractual set of cash flows (interest and principal) whereas equity investors have a claim on the residua] cash flows of the firm after satisfying all claims and liabilities.
  • Debenture holders are creditors of the firm whereas equity shareholders are legal owners of the company.
  • Debentures are issued for a specified period of time and are mostly redeemable either through sinking fund or buyback provision. Equity share are the source of permanent capital since they have no maturity date.
  • The rate of interest paid to the debenture holders is fixed and known. It is paid annually or semi-annually to the debenture holders regardless of market price of a debenture. Whereas equity shareholders are entitled to get dividend. The rate or amount of dividend is never fixed. It is fixed by board of directors. Therefore, equity share is also known as variable income security.
  • Interest paid to debt investors represents a tax-deductible expense, whereas dividend paid to equity investors has to come out of profits after tax.
  • Equity shareholders being the owners of the firm enjoy the prerogative to control the affairs of the firm whereas debt investors play a passive role.
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