Debenture Financing
The debentures are having a great significance as a means of corporate financing.
Through debentures, the company is enabled to have the capital without giving any control over their holders.
There is a certainty of finance for a specific period and the company can adjust its financial plan accordingly
By issuing the debentures, the company gets an opportunity to trade on equity. Consequently, it results in increasing the return for the equity shareholders.
There are certain individuals and institutional investors who are cautious and prepared to assume minimized risk. For them the security of capital is more important than the uncertain high rate of return on capital. This preference of investors compels a company in order to have debentures as a source of raising finance.
The trends in the financial market affect the psychology of investors and it is highly unremunerative to issue such securities which fails to consider the investor's preference. The investors' debentures have a great market response during depression or when the possibilities of inflationary profits are rare. Under such conditions, the financial needs will be fulfilled by a company through the issue of debentures.
The debentures may be issued out of necessity as a situation may be reached in a company where it may be compelled to mortgage assets for the purpose of raising the funds.
A company might have already incurred in a number of small debts of short duration which may be proving costlier and burden some. Such debts can be converted into a single issue of debenture which will prove less costly.
Limitations of debenture finance:
All companies cannot usefully issue debentures, particularly the companies with the following characteristics cannot include debentures in their financial plan.
1. A company with highly fluctuating earnings takes a great risk by issuing debentures which may entail a great strain on its resources. In that case, the interests of the shareholders are adversely
Through debentures, the company is enabled to have the capital without giving any control over their holders.
There is a certainty of finance for a specific period and the company can adjust its financial plan accordingly
By issuing the debentures, the company gets an opportunity to trade on equity. Consequently, it results in increasing the return for the equity shareholders.
There are certain individuals and institutional investors who are cautious and prepared to assume minimized risk. For them the security of capital is more important than the uncertain high rate of return on capital. This preference of investors compels a company in order to have debentures as a source of raising finance.
The trends in the financial market affect the psychology of investors and it is highly unremunerative to issue such securities which fails to consider the investor's preference. The investors' debentures have a great market response during depression or when the possibilities of inflationary profits are rare. Under such conditions, the financial needs will be fulfilled by a company through the issue of debentures.
The debentures may be issued out of necessity as a situation may be reached in a company where it may be compelled to mortgage assets for the purpose of raising the funds.
A company might have already incurred in a number of small debts of short duration which may be proving costlier and burden some. Such debts can be converted into a single issue of debenture which will prove less costly.
Limitations of debenture finance:
All companies cannot usefully issue debentures, particularly the companies with the following characteristics cannot include debentures in their financial plan.
1. A company with highly fluctuating earnings takes a great risk by issuing debentures which may entail a great strain on its resources. In that case, the interests of the shareholders are adversely