Why Companies Prefer to Debenture Issue

Avoid Dilution

When a corporation issues more stock, its current shareholder stakes may be diluted. For
example, a shareholder who owns 100,000 out of 1 million shares of stock outstanding owns 10
percent of the company. If the company issues 500,000 more shares, that 100,000-share stake
will shrink to 6.7 percent. Earnings per share will also shrink because they are calculated by
dividing net earnings by the total number of shares outstanding. As debt securities, debentures do
not cause dilution, although they might negatively impact earnings per share because of the
added interest expense.

Preserve Current Corporate Structure

A corporation can issue new stock when it can find buyers for it. If the current shareholders are
not able or willing to buy more stock, new shareholders will come on board and change the
current ownership structure. As debt securities, debentures do not represent ownership in a
company and do not affect the current ownership structure.
SOME OF THE ADVANTAGES OF USING A DEBENTURE

Debentures ensure a higher position in the ‘pecking order’ for repayment as a creditor.
Otherwise, the loan is unsecured - the position of unsecured creditors near the bottom of the
payment hierarchy means a significantly lower chance of recovering any money.

Valuable financial protection and reassurance is provided for directors as regards their personal
funds.

The use of debentures can encourage long-term funding to grow a business. It is also cost-
effective when compared with other forms of lending.

Debentures usually provide a fixed rate of interest for the lender, and this has to be paid before
any dividends are issued to shareholders.

Control of the company by existing shareholders is not reduced, and profit-sharing remains in the
same proportion.
Temporary Financing

Stocks are perpetual securities: once a corporation issues shares, it is under no obligation to
redeem them. A shareholder must find a buyer if he wants to dispose of his stake. When a
company issues new shares, it shares the ownership with new shareholders forever. Debentures
are issued for a limited time and repaid in full. A corporation can raise capital through
debentures when it needs the money and pay it back when it has a fund surplus.

Cost Management

A debenture has a maturity date when it must be repaid in full and a call date when it can be
redeemed, or called, by the issuer prior to maturity. The issuer must pay interest on the debenture
but if it can find cheaper financing elsewhere, it can call the debenture and issue a new security
at a lower cost.
 Assignment:
Advanced Accounting I
Debenture Bonds and TFCs

Submitted to:
Ms. Rabia Aslam
Management Sciences

Submitted By:
Amina Rizwan (09)
Faiza Qayyum (09)
Hafiza Mahnoor Nasir (12)
Sabuha Hanif (26)
Nayab Riaz (36)
B.com III

Date of Submission:
December 18, 2018