8f Debentures Flashcards

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1
Q

What is a debenture?

A

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

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2
Q

What are the advantages of debentures?

A
  • 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.
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3
Q

What are the disadvantages of dentures?

A
  • 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.
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4
Q

What are the 3 differences between shares and debentures?

A
  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.
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