Difference between equity and debt

Posted By: Sm Adminon: November 18, 2015In: Miscellaneous

Equity:
Equity is the difference between the value of the assets and the liabilities of something owned. Equity is what the owners of an entity have invested in the enterprise. Its types are: Ordinary share capital, preference share capital, retained earnings and revaluation surpluses.
Debt:
An amount of money borrowed by the one party from another with a condition that the amount should be returned back along with the interest. The types of debt are: mortgage loans, car loans and credit card debt.
Differences:

Basis	Equity	Debt
Definition (www.oxforddictionaries.com)	The value of shares issued by the company.	A sum of money that is owed or due.
Synonyms	Honesty, fairness, integrity, justice and piece	Liability, obligation, credit, capital and commitment
Antonyms	Bias, dishonesty, unfairness and partiality	Asset, irresponsibility, profit, cash and excess
Types	The types of equity are: Contributed capital Gained capita Revenue	The types of debt are: Secured/unsecured Private/public Loan Bond
History	Equity was developed two or three hundred years after the birth of the common law system to resolve disputes where damages were an unsuitable remedy and to introduce fairness into the legal system.
Word origin	It was originated from Middle English: from Old French equité.	It was originated from Middle English dette: from Old French.
Calculation	Value of Asset – Debt	Amount Owed – Value of Asset
Cost Formula	Re = rf + β (rm – rf) [where Re is cost of equity; rf is the risk-free rate; rm is the expected market return; β is equity beta.]	Rd (1-tc) [where Rd is cost of debt; tc is corporate tax rate.]
Uses	For estimating potential gain in any asset transaction, for use as purchasing power. Can be traded for debt and other advantages by companies.	For purchasing assets that are more valuable than a party’s current ability to pay for them. Can be traded for equity and other advantages by companies.
Pronunciation	Eng (UK): / ˈɛkwɪti / Eng (US): / ˈekwədē /	Eng (UK): / dɛt/ Eng (US): / det /
Advantages/Benefits	Its advantages are: Lowers risk Equity tends to increase your credibility Long term equity vs. short term debt No repayments Increase your cash flow	Its advantages are: Interest on debt can be deducted on the on the company’s tax return. Raising debt capital is less complicated. A lender is designate only to the repayment of the agreed principal of the loan plus interest.
Disadvantages	Its disadvantages are: High returns Giving up control of your business It complicates the decision making process Extensive time and expenses	Its disadvantages are: Debt must be repaid. Debt instruments often contain the restrictions on the company’s activities. High the debt equity ratio, there would be more risk in the business.
Example in Sentence	There is no equity in the government’s tax. Our equity funds are doing very well at the current situation.	My debt to you is done. I settled my old debt and I didn’t even know.