Equity and Debt Holders

Both equity and debts holders have a claim against a company. An equity holder has ownership of a company or partial ownership. This entitles the equity holder to certain revenue that is made in the operation of the company. This is paid in the form of dividends. The equity holder has a claim against the profit of the company, because it entitles the holder to the excess of revenues.

The debt holder on the other hand has a claim against the company but not one of ownership. The debt holder has a certain property claim against the company. The debt holder has effectively purchased something of value for the company. This allows the company to operate and produce revenues, but the debt holder does not acquire a claim to the revenues. The debt holder’s claim is limited to thing used for the operation rather than the products of the operation.

The shareholder takes part in the business in purchasing equity. However, the debt holder offer something needed for the operation to occur and his claim is limited to property claim. The shareholder has a claim against the company as a value creating entity, while the debt holder has a claim against the property loaned to the company, but not the company as a whole.

The debt holder does obtain a claim against the whole of the company in the case of default. Where the company cannot properly return what was loaned according to the terms of the agreement, the debt holder has the claim to recoup his loan from the company by obtaining ownership to parts of the company, either directly or through liquidation.

The equity holder has claim to the operations of the company and the consequent revenues, while the debt holder has a claim to the property of the company and consequent rent or interest payments.

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