Leverage company with a lot of debt is highly leveraged, which is good for the shareholders. It means that they have less risk, and higher participation. Debt holders are entitled to a fixed amount of interest. It only works if the company is going to be successful. You would prefer to hold shares if you would like a risk. Debt with low debt to equity ratio = holding debt is more secure. Common shares have the residual, preferred shareholders have some sort of preference (in voting, income) To debt and equity being combined together, percentage figure. Abc company has million debt at 8% and million common share equity. Required rate of return of common shareholders is 20%. Right company has 000 debt at 12% and 000 common share equity. Rate of return of common shareholders is 18%. Abc company has million debt at 10% and million common share equity.