Answer to Question #2174 in Finance for sherif

Question

Differentiate between the charactaristics and features of debt and capital (both common and preffered stock).

Answer 1

Capital - a value advanced to the production in order to obtain additional cost, these are costs create and bring added value.
A debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor.
The first difference in instruments of capital and debt formation: capital is formed mostly by shares and retained earnings and debt - with the help of debt securities (bonds, bills, etc.) and loans.
Another difference is the availability and cost of capital and debt. Debt capital is more available and cheaper than equity, but excessive use of debt leads to a reduction of liquidity, or bankruptcy.
Another feature is the need to pay both for equity and debt. Payment for equity –is a dividend to shareholders, debt charges is interest on debt.
Payment for debt is a priority over other payments.