Equity = amounts invested by the owners of the business (SHARE CAPITAL) (RETAINED PROFITS) LOWER RISK, LOWER REWARD

Debt = Finance provided to the business by external parties (BANK LOANS) (OTHER LONG-TERM DEBT) HIGHER RISK, HIGHER REWARDS (MAKING PROFIT ON OTHERS’ MONEY)

Reasons for higher equity in capital structure:

  • where there is greater business risk (startups)

  • where more flexibility required (don’t have to pay dividends, with a loan you have to pay interest)

Reasons why high levels of debt can be an objective

  • where interst rates are very low = debt is cheap to finance

  • where profits and cash flows are strong; so debt can be repaid easily (unicorn businesses)