Evaluate debt capital versus equity capital as methods of financing expansion for a business. - Leaving Cert Business - Question 5 - 2012

Debt capital requires fixed interest repayments regardless of the business's profitability. For example, loans might come as debentures or bonds that necessitate regular payments. Conversely, with equity capital, there are no mandatory repayments. If the company chooses to pay dividends, they may be small or even unpaid, which does not affect cash flow as strictly as debt obligations do.

Debt capital is often associated with higher risk since the business becomes highly geared. Fixed repayments are required, which can lead to financial distress. In contrast, equity capital bears lower risk since there are no mandatory payments. If the business underperforms, equity holders may suffer, but the pressure to meet fixed obligations is absent.

When utilizing debt capital, security may be required; businesses need to secure loans with assets, committing to long-term liabilities. In contrast, with equity capital, no collateral is needed as the investment is raised through shareholders who accept a share of future profits rather than securing loans.

Debt capital offers tax-deductible interest payments, leading to potential tax savings. On the other hand, dividends paid to equity shareholders are not tax-deductible, meaning the company's taxable income may be higher, impacting potential gains for shareholders.