8f Debentures

Question 1

What is a debenture?

Answer 1

Document issued by a company containing an acknowledgment of its indebtedness.

Question 2

What are the advantages of debentures?

Answer 2

• Board doesn’t need authority of generla meeting to issue.
• Carries no vote so doesn’t dilute or affect the control on the company.
• Interest is chargeable against profit before tax.
• May be cheaper to service than shares.
• No restrictions on issuing at discount.

Question 3

What are the disadvantages of dentures?

Answer 3

• Interest must be paid out of pre-tax profits.
• May precipitate liquidation and/or administration if the debentures are secured.
• High gearing will affect share price.

Question 4

What are the 3 differences between shares and debentures?

Answer 4

1. Shareholders are members, debenture holders are creditors.
2. Shareholders receive dividends, debentures receive interest.
3. Shares cannot be issued at discount but debentures can.