Every religion warns against borrowing money, but a special vitriol is reserved for lenders, not borrowers, for encouraging this behavior. Governments, on the other hand, have encouraged the use of debt by providing tax benefits to businesses and individuals who borrow money. The use of debt by businesses involves a trade-off between borrowing too little and leaving tax benefits on the table, and borrowing too much and exposing oneself to default risk. The key distinction between debt and equity lies in the nature of the claims that its holders have on cash flows from the business. Debt entitles its holders to contractual claims on cash flows, while equity gives its holders a claim on whatever is left over. There are illusory benefits and costs of debt, including the idea that borrowing increases the return on equity and that debt is cheaper than equity. The real benefits of borrowing include tax benefits and debt as a disciplinary mechanism, while the real costs include expected bankruptcy costs and agency costs. Frictional reasons for borrowing or not borrowing include bankruptcy protections, subsidized debt, corporate control, debt covenants, overpriced equity, and regulatory constraints. The debt equity trade-off can be optimized using the cost of capital, which is the discount rate used to discount cash flows back to get to a value. The optimal debt mix of a business is the one that leads to the lowest cost of capital.