What is the primary distinction between debt and equity financing from a control perspective?

• A. Debt dilutes ownership and claims; equity dilutes ownership and claims.
• B. Debt imposes fixed obligations and may affect control; equity dilutes ownership.
• C. Debt dilutes ownership and claims; equity imposes fixed obligations and may affect control.
• D. Debt reduces control for owners; equity increases control.

Answer: (C)

From a control perspective, the big difference lies in who has influence over decisions and cash flows. Debt financing does not change who owns the company, but it creates fixed obligations—interest and principal payments—that must be met regardless of profits. Those fixed payments can constrain management choices, and if covenants are breached or default occurs, lenders can gain leverage or require corrective actions. Equity financing, on the other hand, brings in new owners with voting rights, so issuing additional shares dilutes existing owners’ ownership and control. In short, debt imposes fixed obligations that can affect control through lender protections, while equity dilutes ownership and voting power.