What is the Role and Importance of Insurance? The process of insurance has been evolved to safeguard the interests of people from uncertainty by providing certainty of payment at a given contingency. The insurance principle comes to be more and more used and useful in modern affairs.
Get Full Essay Get access to this section to get all help you need with your essay and educational issues. Strictly speaking, it is not a capital, but a loan to the company. It is often secured by either a change on assets of floating charge on all assets.
For this case bubble milk-tea business has grown tremendously, and the director plan to set-up 5 stalls and its capital needed is estimated to be around RM Debentures are one of the common long term sources of finance.
They normally carry a fixed interest rate and a certain date of maturity. There are several advantages of using debentures as a source of long term finance but at the same time they come along with certain disadvantages also.
Following are some advantages and disadvantages of debentures from the point of view of a company.
No Dilution of Control: Issuing of debentures does not affect control of the existing shareholders or the owners of the company. If the same fund is raised using equity finance, the control of existing shareholders would dilute accordingly.
By involving debt in a company making profits, the management can always maximize wealth of the shareholders. This is how involvement of debentures can lead to welfare of the shareholders. The burden of interest is fixed in debentures irrespective of the business profits, operational situations etc.
This makes the entrepreneur all the more cautious and committed towards managing the business and maintaining the cash flows effectively. It is because a severe punishment i. No Dilution in Share of Profits: Opting for debentures over the equity as a source of finance saves the profit shares of existing shareholders.
Debenture holders do not share profits of the company. They are liable to receive the agreed amount of interest only. Debenture raises the leverage of the business. High leverage means high risk in the form of bankruptcy.
Bankruptcy is not the only risk but if the rate of return of the company declines below the debenture interest rate at a later stage after issuing the debentures, it can bring the whole project on a toss. Interest payment to the debenture holders is a legal obligation and the business has to honor the same come what may.
This feature of debenture creates a problem for the business in the bad times. Debenture holders are not going to understand the genuine business problems and why should they? Under this situation, a new business which is just about to take off cannot have such disciplined cash flows to pay the interest timely.
Debenture is not a right kind of financing option for them especially in their nascent stage. Bad for Low Inflationary Conditions: Although fixed interest has certain benefits, they are also accompanied with disadvantages.
Under low inflationary conditions, the cash outflow remains constant but the value of the money increases. To compare it with business situations, the market price of the products of the company will decline in low inflationary conditions but the interest payment will remain same and hence that will create loss making mismatch.
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An Optionally Fully Convertible Debenture is just a kind of Bond that can be converted into Equity Shares by the investors if they want to. So, this is a kind of hybrid market instrument that would come under the jurisdiction of the Securities and Exchanges Board of India (SEBI).