How does debt vs. equity affect a company’s value and funding cost?

Debt and equity are two primary ways companies raise capital, but they impact value and costs differently. Debt involves borrowing funds with an obligation to repay with interest, making it a cheaper source of capital due to tax benefits on interest. However, excessive debt increases financial risk. Equity involves selling ownership shares, which doesn’t require repayment but dilutes ownership and control. Investors in equity expect higher returns, making it more expensive than debt in the long run. The mix of debt and equity—known as capital structure—affects a company’s cost of capital and overall risk profile. A balanced structure can optimize growth and valuation, while a poorly managed one can lead to instability. Companies must carefully choose the right mix based on goals, risk tolerance, and market conditions.