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"Say that the Boeing Company plans to spend $2 billion over the next four years to build and equip new factories to make jet aircraft. Boeing’s top management will assess the pros and cons of both debt and equity and then consider several possible sources of the desired form of long-term financing. The major advantage of debt financing is the deductibility of interest expense for income tax purposes, which lowers its overall cost. In addition, there is no loss of ownership. The major drawback is financial risk : the chance that the firm will be unable to make scheduled interest and principal payments. The lender can force a borrower that fails to make scheduled debt payments into bankruptcy. Most loan agreements have restrictions to ensure that the borrower operates efficiently. Equity, on the other hand, is a form of permanent financing that places few restrictions on the firm. The firm is not required to pay dividends or repay the investment. However, equity financing gives common stockholders voting rights that provide them with a voice in management. Equity is more costly than debt. Unlike the interest on debt, dividends to owners are not tax-deductible expenses. Long-term debt is used to finance long-term (capital) expenditures. The initial maturities of long-term debt typically range between 5 and 20 years. Three important forms of long-term debt are term loans, bonds, and mortgage loans. Major Differences between Debt and Equity Financing: Debt Financing—Creditors typically have none, unless the borrower defaults on payments. Creditors may be able to place restraints on management in event of default. Debt holders rank ahead of equity holders. Payment of interest and principal is a contractual obligation of the firm. Debt has a stated maturity and requires repayment of principal by a specified date. Equity Financing—Common stockholders have voting rights. Equity owners have a residual claim on income; dividends are paid only after paying interest and any scheduled principal, and there is no obligation to pay dividends. The company is not required to repay equity, which has no maturity date."