Why do Equity Holders Love Debt?

"Take two different companies. Each one has assets worth $1,000. The first has funded its assets with $800 in borrowed money and $200 in equity from investors. Let’s say the interest rate on the borrowed money is 10 percent and the tax rate is 50 percent. Each year the $1,000 worth of assets produce $200 in operating profits. Eighty dollars goes to pay interest on the debt, which the government allows you to charge as an expense. Of the remaining $120, $60 goes to pay taxes and the remaining $60 goes to the equity holders. For their investment of $200, the equity holders receive an annual return of 30 percent. Now imagine the same company in which all the assets were funded with equity. They produce the same $200 in operating profits. There is no interest payment. A hundred dollars goes to pay taxes, leaving the equity holders with $100, a 10 percent return. Which would you rather have? A 30 percent return or a 10 percent return?"

- From Ahead of the Curve by Philip Delves Brooughton