Background Note | HBS Case Collection | February 1999 (Revised October 2009)

Debt v. Equity: Definitions and Consequences

by Henry B. Reiling and Mark Pollard

Abstract

Explores the location of the somewhat imprecise line between debt and equity. Identifies the primary business contexts that give rise to problems, the alternative tax consequences attending the debt versus equity determination, and the most prominent tests used to resolve the questions. Deals with corporate debt paying a market rate of interest and issued at par or close to it.

Keywords: Borrowing and Debt; Equity; Interest Rates; Taxation; Business and Government Relations; Public Administration Industry;

Citation:

Reiling, Henry B., and Mark Pollard. "Debt v. Equity: Definitions and Consequences." Harvard Business School Background Note 299-041, February 1999. (Revised October 2009.)