What advantages does an issue of debentures provide over the issue of equity shares?
What advantages does an issue of debentures provide over the issue of equity shares?
Advantages of issuing debentures over the issue of equity shares are :
(1) Benefits of Trading on Equity: Issue of debenture may lead to trading on equity by keeping equity low and earnings high on that to increase earnings per share. Issue of more equity may decrease earning per share.
(2) Tax Benefits: Debentures have fixed financing cost in the form of interest which is deductible from the profit resulting in a lower tax burden. But dividends paid on equity capital is not tax deductible.
(3) No Dilution of Control: Equity shareholders have voting rights in proportion to the number of shares held by them through which they exercise control over management, thus diluting the control. But debentures holders do not get voting rights, therefore, there is no possibility of dilution of control.
(4) Reliable Source: Debentures are the first choice of investors who want regular & fixed income on their investment. Even in depression, and bearish market situation, a company can raise capital through issuing debentures. On the other hand, as on equity capital, no regular and fixed dividends may be given, so it scores less than debentures by the investors.
(5) Redemption: A company has to redeem debentures on their expiry date thus reducing its financial obligation and can issue more debentures if more capital is required but this flexibility is not allowed by the issue of equity capital as equity shares can be redeemed only at winding up of the company.
(6) Returns: As the rate of return paid on debentures is fixed so when earnings of the company are large out of profits only a certain amount is paid as interest and rest of the profits is used for paying high dividends. Thus debentures give scope for retained earnings and capital appreciation on equity shares.
Advantages of issuing debentures over the issue of equity shares are :
(1) Benefits of Trading on Equity: Issue of debenture may lead to trading on equity by keeping equity low and earnings high on that to increase earnings per share. Issue of more equity may decrease earning per share.
(2) Tax Benefits: Debentures have fixed financing cost in the form of interest which is deductible from the profit resulting in a lower tax burden. But dividends paid on equity capital is not tax deductible.
(3) No Dilution of Control: Equity shareholders have voting rights in proportion to the number of shares held by them through which they exercise control over management, thus diluting the control. But debentures holders do not get voting rights, therefore, there is no possibility of dilution of control.
(4) Reliable Source: Debentures are the first choice of investors who want regular & fixed income on their investment. Even in depression, and bearish market situation, a company can raise capital through issuing debentures. On the other hand, as on equity capital, no regular and fixed dividends may be given, so it scores less than debentures by the investors.
(5) Redemption: A company has to redeem debentures on their expiry date thus reducing its financial obligation and can issue more debentures if more capital is required but this flexibility is not allowed by the issue of equity capital as equity shares can be redeemed only at winding up of the company.
(6) Returns: As the rate of return paid on debentures is fixed so when earnings of the company are large out of profits only a certain amount is paid as interest and rest of the profits is used for paying high dividends. Thus debentures give scope for retained earnings and capital appreciation on equity shares.
