Why is debt a comparatively cheaper form of finance than equity?

It is cheaper for the company in two respects. First the interest payments from the debt is a business expense and is tax deductable. Dividend payments on equity is not an expense item and is not tax deductable. Second, when calculating earnings per share, the total earning of the company are divided by the total number of shares outstanding. The fewer the number of shares, the higher the earnings per share and correspondingly the higher the stock price. In fact quite a few companies have stock buy back programs fueled by debt financing.

As far as i can understand,the question seems to be wrong.Debt is used for financing but equity is a form of ownership so no question of it being cheap or expensive.

You are right, Jitu doesn't understand that companies finance themselves through both debt and equity (selling shares, sometimes selling new shares).

Debt is cheaper because it is less risky. There is a correlation between risk and reward. Less risk equals less reward.

Debt-holders get paid before equity-holders in bankruptcy. Interest on debt gets paid before dividends to shareholders.

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