Specifically, debt is cheaper (to the entity raising funds) in the sense that the creditor charges less for it. But, if the charge applicable to debt is self-evident – in the form of the interest rate – it is less so in the case of equity. What is the ‘charge’ on (or better, embedded in) equity? It is, essentially, the financial return that the fundraising entity forgoes by virtue of the fact that it has sold an ownership interest. The larger that equity stake, the greater the cost. The higher the proportion that comprises debt, the more highly ‘geared’ or ‘leveraged’ funding is said to be.
