How can I differentiate between debt capital and equity capital?

Both of them provide bussiness with much nedeed funds. -Debit capital refers to funds that are borrowed and must be paid at later dDebit allows a company to leverage a small amount of money into a much greater sum, lenders typically require the the payment of intrest in return for the privillege

 

Debt Capital

Debt capital refers to funds that are borrowed and must be repaid at a later date. While debt allows a company to leverage a small amount of money into a much greater sum, lenders typically require the payment of interest in return for the privilege. This interest rate is the cost of debt capital. If a company takes out a $100,000 loan with a 7% interest rate, the cost of capital for the loan is 7%. However, because payments on debts are often tax-deductible, businesses account for the corporate tax rate when calculating the real cost of debt capital by multiplying the interest rate by the inverse of the corporate tax rate. Assuming the corporate tax rate is 30%, the loan in the above example then has a cost of capital of 0.07 * (1 - 0.3) or 4.9%.

 

Equity Capital

Because equity capital typically comes from funds invested by shareholders, the cost of equity capital is slightly more complex. While equity funds need not be repaid, there is a level of return on investment that shareholders can reasonably expect based on the performance of the market in general and the volatility of the stock in question. Companies must be able to produce returns – in the form of healthy stock valuations and dividends – that meet or exceed this level to retain shareholder investment. The capital assest pricing model (CAPM) utilizes the risk-free rate, the risk premium of the wider market, and the beta value of the company's stock to determine the expected rate of return or cost of equity.

 

Typically, the cost of equity exceeds the cost of debt. The risk to shareholders is greater than to lenders since payment on debt is required by law regardless of a company's profit margins.

Thanks for invitation,

In a very breif and prcise wording:

Both "Equity Capital" and "Debt Capital" are in fact, the most two common financial options for growing the business.

While "Equity Capital", involves raising the business' capital through selling part of its interests via new equity sharing.  

Whereas, "Debt Capital" involoves borrowing money for banks and financial institutions, that are repaid plus interest later on, without need for any new equity sharing.

A business may require funds for its operations and Debt Capital or Equity Capital are one of the ways to do so. The main difference is the source of Capital:

DEBT CAPITAL is a loan obtained from a bank or a financial institution for the business and is repaid with an interest.

EQUITY CAPITAL is the funds invested into business by the owner or an investor against ownership in the business.

Equity capital is basically the funds paid into a business by investors in exchange for common or preferred stock. This represents the core funding of a business. While the Debt capital is the capital that a business raises by taking out a loan. 

Debt capital:

Amount owed by you to an institution governed by capital market body.

It's cost (annual interest) is fixed and payable irrespective of the company performance.

The capital is payable by the end of fixed period. In-case of bankruptcy or the end of business, it must be paid before other debts.

Equity capital:

Assets (cash / capital equipment) injected into the business by the owners/shareholders. Payable to partners/shareholders as per agreement or partners/shareholders desire.

Return on investment is neither payable as per law, nor it is fixed annually.

Investment may get worthless that is to say loss, incase, the business ends and nothing is left to pay off after debts have been paid off.

The assets of a company comes from two sources - creditors and owners. 

Debt capital is equal to that portion of the asset coming from creditors, while equity capital is equal to that portion financed by the business' owners. 

Creditors are paid interest in exchange for the debt capital, while business owners are entitled to the business profit for having an equity in the business. 

Creditors are entitled to the return of the debt capital before business owners are given their equity capital in case of business liquidation. 

Debt capital have fixed term of payment, while equity capital does not have fixed term of payment. 

Debt Capital is capital raised through loan..Equity capital,owner raised through stock or land.

A clear first step to lining up outside capital is to determine whether equity investment or debt financing (or a combination of the two) might be the best route.

Owners equity means no. of shares held by owners in the company or share capital. Share capital of the company can be owned by investors of the company, who need not be the owners. ... Equity is the owner's share of the assets (Cash, inventory, equipment, movable/ immovable property, profits) of a business.The debt belongs to the ongoing movement of the company's profits

is the capital that a business raises by taking out a loan. It is a loan made to a company, typically as growth capital, and is normally repaid at some future date. Equity capital is funds paid into a business by investors in exchange for common or preferred stock. This represents the core funding of a business, to which debt funding may be added. Once invested, these funds are at risk, since investors will not be repaid in the event of a corporate liquidation until the claims of all other creditors have first been settled.