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Which one of the following is NOT the disadvantage of raising funds through debentures?
- a)No Dilution of control
- b)All of the options.
- c)Charge on assets
- d)Fixed obligation
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Which one of the following is NOT the disadvantage of raising funds th...
No Dilution of Control is not a disadvantage of raising funds through debentures.
Debentures are long-term debt instruments issued by companies to raise funds from the general public or institutional investors. They offer a fixed rate of interest and have a specific maturity date. While debentures have several advantages, such as lower cost of capital and tax benefits, they also have certain disadvantages. However, "No Dilution of Control" is not one of them.
Let's discuss the other three options in detail:
1. Charge on Assets:
When a company issues debentures, it usually creates a charge on its assets as security for the debenture holders. This means that if the company defaults on its interest or principal payments, the debenture holders have the right to claim the assets pledged as collateral. This can restrict the company's ability to use the assets for other purposes or obtain further financing against them. Additionally, the charge on assets can lower the creditworthiness of the company, making it difficult for it to raise funds through other means.
2. Fixed Obligation:
Debentures come with a fixed obligation to pay interest and principal on specified dates. This means that the company must make regular interest payments and repay the principal amount at the maturity of the debentures. These fixed obligations can put financial strain on the company, especially during periods of low profitability or cash flow difficulties. Failure to meet these obligations can lead to legal consequences and damage the company's reputation.
3. All of the Options:
This option is incorrect because all of the options mentioned (Charge on Assets, Fixed Obligation, and No Dilution of Control) are actually disadvantages of raising funds through debentures. Therefore, "All of the Options" is not the correct answer.
In conclusion, the correct answer is option 'A' - No Dilution of Control. Unlike equity financing, debentures do not dilute the control of existing shareholders as they do not carry voting rights. However, this is not a disadvantage of raising funds through debentures.
Debentures are long-term debt instruments issued by companies to raise funds from the general public or institutional investors. They offer a fixed rate of interest and have a specific maturity date. While debentures have several advantages, such as lower cost of capital and tax benefits, they also have certain disadvantages. However, "No Dilution of Control" is not one of them.
Let's discuss the other three options in detail:
1. Charge on Assets:
When a company issues debentures, it usually creates a charge on its assets as security for the debenture holders. This means that if the company defaults on its interest or principal payments, the debenture holders have the right to claim the assets pledged as collateral. This can restrict the company's ability to use the assets for other purposes or obtain further financing against them. Additionally, the charge on assets can lower the creditworthiness of the company, making it difficult for it to raise funds through other means.
2. Fixed Obligation:
Debentures come with a fixed obligation to pay interest and principal on specified dates. This means that the company must make regular interest payments and repay the principal amount at the maturity of the debentures. These fixed obligations can put financial strain on the company, especially during periods of low profitability or cash flow difficulties. Failure to meet these obligations can lead to legal consequences and damage the company's reputation.
3. All of the Options:
This option is incorrect because all of the options mentioned (Charge on Assets, Fixed Obligation, and No Dilution of Control) are actually disadvantages of raising funds through debentures. Therefore, "All of the Options" is not the correct answer.
In conclusion, the correct answer is option 'A' - No Dilution of Control. Unlike equity financing, debentures do not dilute the control of existing shareholders as they do not carry voting rights. However, this is not a disadvantage of raising funds through debentures.
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