In the context of finance, what term refers to the potential income lost by using debt instead of equity?

The term that refers to the potential income lost by using debt instead of equity is opportunity cost. Opportunity cost is a fundamental concept in finance and economics that captures the value of the best alternative that is foregone when a choice is made. When a company opts to fund operations through debt, it incurs interest obligations and a potential risk of bankruptcy, versus using equity which might not impose the same immediate financial burdens. The opportunity cost involves considering what the company could have gained had it chosen the other option—typically investing in projects or opportunities that may yield higher returns.

The other terms mentioned do not encapsulate this idea. Sunk cost refers to money that has already been spent and cannot be recovered, which does not factor into the decision-making process regarding debt versus equity. Fixed cost refers to ongoing expenses that do not change with the level of output, while marginal cost relates to the cost of producing one additional unit of a product. None of these terms address the concept of the trade-off in potential income associated with the choice between utilizing debt or equity for financing.