UNIT 4: Managing II

Debit Capital V Equity Capital

Debt Capital = ________________ + ________________
Equity capital = ________________ + ________________+ ________________
DEBT CAPITAL

Control

Interest
Repayments/Dividen
ds

Risk

Security/Collateral

Tax Implications

EQUITY CAPITAL

Debit Capital Vs. Equity Capital

Debt Capital = Preference Shares + Long Term Debt
Equity capital = Ordinary Share Capital + Reserves + Grants
Debt Capital

Equity Capital

Control

Debt capital used to

finance
the business will not
impact
on control of the
business.

The issue of shares may

dilute
control of the business.

Interest
Repayments/Dividends

Fixed Interest
repayments
must be made e.g.
Debentures
Fixed Dividends e.g. 8%
Preference Shares

None There is no
obligation to ordinary
shareholders. However, if
dividends are routinely
small or not paid, this
may adversely affect
share price.

Risk

High the business is

highly
geared. Fixed interest
repayments on debt
capital
must be made regardless
of
profitability.
Increased risk of
bankruptcy
more creditors, who may
seek
to have business wound
up
and assets liquidated to
pay
debts.

Low the business is

lowly geared.
The business has no
long-term debt and no
interest repayments.
Business less likely to
become
bankrupt, as fewer
creditors.

Security/Collateral

Security is required for

Debt
Capital.

No security required

Tax Implications

Interest repayments are

tax
deductible.

Dividends to ordinary
shareholders are not tax
deductible.

General Points
Generally, companies will use a combination of both Debt and Equity
Capital to finance theirbusiness. The ratio between Debt Capital and
Equity Capital is referred to as gearing(Low/High).
Equity capital is low risk and does not require security. However, current
loss of confidence in the stock market is a challenge to raising equity
capital.
Adequate investment by the owners makes it easier for the company to
borrow money tofinance expansion.
Debt capital is high risk interest must be repaid irrespective of
profitability. Currenteconomic climate poses challenges in accessing credit
and maintaining profit margins.