Q.What are the merits and limitations of Debentures as a source of finance?
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Start your 14-day free trial to unlock the full solution →Debentures, as a source of long-term borrowed finance, offer a company several advantages. The interest paid on debentures is a tax-deductible expense, which lowers the effective cost of this source compared with dividend, which is not tax-deductible. Debenture holders have no voting rights, so raising funds through debentures does not dilute the control of existing equity shareholders. Because debenture interest is fixed and often lower than the dividend equity shareholders would otherwise expect, using debentures alongside equity can, in a good year, raise the return available to equity shareholders — the benefit of trading on equity. …
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