what is the difference between debt capital and equity capital?

Answer 1

Debt capital is raised by taking out a loan, or selling bonds.

Equity capital is raised by selling shares to investors. They own the enterprise, but lenders are first in line to claim assets when the enterprise goes bankrupt.

Typically, shareholders equity is zero when a company goes bankrupt, and the bondholders may get a fraction of their original principal. But in return, shareholders equity can be huge (think Google) if the company is a raging success. Successful original bondholders will only get their principal plus interest if they hold to maturity.

Answer 2

There are a lot of differences. Debt capital is money that the firm borrows from people in the form of bonds. It then pays interest on that debt periodically and pays back the principal in full at the maturity of the bond. If it fails to pay interest or principal, the investor holding the bond can force the firm to liquidate (bankrupt) and sell off its assets to pay the obligation. Equity is capital raised through the markets, in the form of shares of stock. The company has no obligation to pay dividends out through these shares. Stockholders cannot force liquidation.

In the event of liquidation of the firm, the debt holders get their share of the firm's worth before the stockholders. Also, debt financing is required to pay interest periodically. This means that debt is less risky than equity, for the investors. Naturally, with the higher risk of equity financing, the investors expect a higher average return (since they're last to receive any compensation if the company goes under, and they can't force liquidation, and there's no guarantee they receive any dividends ever).

There are also tax differences, because when an investor receives income (be it in the form of interest, or dividends) he must pay income tax on it. When a firm pays out a coupon (bond interest), it is classified as an expense, which it does not have to pay taxes on. Dividends on stocks, though, comes from net income, which the firm has already paid taxes on. So this means that dividend money is taxed twice.

Hope this helps, I can almost guarantee there is more detailed information on wikipedia, but this is a good overview.

Answer 3

Debt capital is from borrowed funds for business. It will have to be repaid with interest and it may short or long term borrowing and interest rates will be charged accordingly. Loans are always secured by some or all the assets of the company. The lender does not have a say on the running of business.
Equity capital is from money got from issue of shares of the company. The shareholders have a say by participating in the General Body of the meeting and for proposals of issue of dividends or bonus shares. The balance and profit and loss accounts will have to be read to the shareholders during this meeting.
VR