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ACCA Applied Skills · Financial Management · Sources of, and raising, business finance

A listed company wants to raise long-term finance by issuing loan notes that are secured by a fixed charge over its freehold property. Which statement about the loan notes is correct compared with ordinary shares?

Loan note interest is a contractual commitment payable whether or not profits arise, and secured lenders are repaid before shareholders on liquidation. Interest is also tax deductible and holders usually have no votes, so ordinary shares differ on each of those points.

  1. AInterest is paid out of post-tax profits and is not tax deductible
  2. BInterest must be paid whether or not profits are earned, and lenders rank before shareholders on liquidationCorrect
  3. CHolders have voting rights at general meetings
  4. DThe company has discretion to omit interest payments in a poor year without default

Explanation

Loan note interest is a contractual obligation, payable regardless of profit, and secured lenders rank ahead of shareholders if the company is wound up. Interest is tax deductible, so the first option is wrong, and loan note holders normally have no votes.

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