Disadvantages of Debenture:
Debenture finance consists of the following major disadvantages:
1. Fixed rate of interest: Debenture consists of fixed rate of interest payable to securities. Even though the company is unable to earn profit, they have to pay the fixed rate of interest to debenture holders, hence, it is not suitable to those company earnings which fluctuate considerably.
2. No voting rights: Debenture holders do not have any voting rights. Hence, they cannot have the control over the management of the company.
3. Creditors of the company: Debenture holders are merely creditors and not the owners of the company. They do not have any claim in the surplus profits of the company.
4. High risk: Every additional issue of debentures becomes more risky and costly on account of higher expectation of debenture holders. This enhanced financial risk increases the cost of equity capital and the cost of raising finance through debentures which is also high because of high stamp duty.
5. Restrictions of further issues: The company cannot raise further finance through debentures as the debentures are under the part of security of the assets already mortgaged to debenture holders.
Sourced From: Financial Management By C. Paramasivan And T. Subramanian
Debenture finance consists of the following major disadvantages:
1. Fixed rate of interest: Debenture consists of fixed rate of interest payable to securities. Even though the company is unable to earn profit, they have to pay the fixed rate of interest to debenture holders, hence, it is not suitable to those company earnings which fluctuate considerably.
[Post Image Courtesy of Stuart Miles at FreeDigitalPhotos.net]
2. No voting rights: Debenture holders do not have any voting rights. Hence, they cannot have the control over the management of the company.
3. Creditors of the company: Debenture holders are merely creditors and not the owners of the company. They do not have any claim in the surplus profits of the company.
4. High risk: Every additional issue of debentures becomes more risky and costly on account of higher expectation of debenture holders. This enhanced financial risk increases the cost of equity capital and the cost of raising finance through debentures which is also high because of high stamp duty.
5. Restrictions of further issues: The company cannot raise further finance through debentures as the debentures are under the part of security of the assets already mortgaged to debenture holders.
Sourced From: Financial Management By C. Paramasivan And T. Subramanian
Disadvantages of Debenture
![Disadvantages of Debenture]()
Reviewed by Blog Editor
on
Monday, March 20, 2017
Rating:
Posts
No comments:
Do you have any reasonable comments for this post ? Please feel free to drop them below using the comment box. We will moderate and publish them as soon as possible. Cheers !