Drawing debt and equity: a graphical approach to teaching capital structure

This paper presents a drawing-based pedagogical method to address some of the difficulties in teaching introductory finance. The approach uses payoff diagrams to visually deconstruct a firm’s total value into the distinct claims of debt (a senior, fixed claim) and equity (a residual claim). By starting with a simple drawing exercise, the intuitive graphical framework allows students to grasp the fundamental relationship between different types of financial claims and serves as a foundation for exploring advanced topics such as agency conflicts in risk-taking and the allocation of control rights.