What are the main differences between corporate debt and
equity? Why do some firms try to issue equity in the guise
of debt?
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Answer Posted / a. sanders
The main differences between the two are:
Debt is not an ownership interst in the firm. Creditors
generally do not have voting power.
The corporation’s payment of interst on debt 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 it is 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. (Ross,
Westerfield & Jaffe, 2010).
The reason some firms try to disguise equity as debt is for
the tax benefits of debt and the bankruptcy benefits of
equity.
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