What is the key difference between equity capital and debt capital?

The key difference between equity capital and debt capital lies in the ownership structure associated with each type of financing. Equity capital involves raising funds by selling shares of the company, which means that investors gain ownership stakes in the business. This exchange allows shareholders to partake in the company's profits and have a say in its governance, dependent on the number of shares owned.

On the other hand, debt capital is raised through borrowing, which entails the company taking on loans or issuing bonds. This form of financing does not provide the lender with ownership; instead, debt holders are entitled to receive interest payments and the return of their principal amount at maturity. Thus, in a situation where a company is funded by equity capital, the investors are owners, whereas with debt capital, they are creditors.

The other options present some misconceptions. Equity capital does not involve borrowing money, which is specifically a characteristic of debt capital. Furthermore, stating that debt capital is universally more expensive than equity capital overlooks that the cost of capital can vary depending on market conditions and risk associated with the specific financing. Lastly, the assertion that debt capital is always risk-free misrepresents the inherent risks in borrowing, such as the obligation to repay regardless of the company's financial performance.