Question

pts.
(b) Discuss the sources of raising finance through the equity
shares and debentures?
Compare their relative merits and
demerits.
(10)​

Answer 1

Answer:

Merits :

1. The cost of debt capital, represented by debentures is lower than the cost of preference or equity capital. This is because the interest on debentures is tax deductible and hence it helps in increasing the rate of return. Thus debenture issue is a cheaper source of finance.

2. Debenture financing does not result in dilution of control of equity shareholders, since debenture holders are not entitled to vote.

3. The fixed monetary payment associated with debentures is interest. This fixed return appeals to many investors, since they are not affected by the fluctuating fortunes of the company.

4. Funds raised by the issue of debentures may be used in business to earn a much higher rate of return than the rate of interest. As a result the equity shareholders earn more.

Demerits :

1. It involves a fixed commitment to pay interest regularly and fixed obligation to pay the amount when it is due on the part of the company.

2. This liability must be discharged even if the company has no earnings. The burden may be difficult to bear in times of falling profits.

Answer 2

Explanation:

Private Placement of Shares: This is a method of raising funds from a group of financial institutions and others who are ready to invest in the company. 4. Issue of Debentures: There are companies who collect long term funds by issuing debentures- convertible, or, non convertible.

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