Section 2.7

Question 1

What do non-current assets provide a company with?

Answer 1

an additional source of capital, over and above shareholder funds, to finance the acquisition of assets and thereby increase profits

Question 2

What are the two risks associated with borrowing?

Answer 2

• The interest on the debt must be paid when due (unlike dividends on shares which do not have to be paid or can be deferred)
• Most borrowing must be repaid by a specific date (unlike share capital, which in most cases isn’t redeemable unless the company goes into liquidation)

Question 3

What are the two main categories of non-current liabilities?

Answer 3

• Debentures and unsecured loan stock

- Convertible loan capital

Question 4

What is a debenture?

Answer 4

loan capital that is normally secured by a fixed or floating charge.

Question 5

What is a fixed charge on a debenture?

Answer 5

A charge on a specific identifiable asset(s) than can be used to repay the loan in the event of borrower default.

Question 6

What is a floating charge on a debenture?

Answer 6

General charge on the assets of the company.

Question 7

If a company goes into liquidation who can call in their security first?

Answer 7

Debenture holders can call in their security before preferential trade payables and then unsecured loan stockholders or other unsecured trade payables receive any other payment.

Question 8

How are debentures and unsecured loan stock sold?

Answer 8

Issues of loan capital that can be made privately to investors or quoted on an exchange and brought and sold in the same way as ordinary shares.

Question 9

Talk about interest on debentures and loan stock?

Answer 9

Both typically cary a fixed annual rate of interest, normally paid every six months irrespective of the company’s profitability.

Most issues given for a term and repayable at the end of that term at a ‘redemption date’

Question 10

What is convertible loan capital

Answer 10

loan capital, normally unsecured, which gives the owner the option to convert to shares. The market normally regards a convertible security as being deferred equity, and therefore the interest rate payable is lower than on the equivalent non-convertible loan capital. These securities rank higher than ordinary shares in the event of a company’s liquidation, but lower than unsecured non-convertible loan stock.