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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Which of the following statements about debentures as a source of long-term finance is correct?

Debenture interest is a fixed charge against profits and is tax deductible, while equity dividends are an appropriation of after-tax profit. Debenture holders are creditors with no voting rights, interest is payable even without profit, and debentures add debt rather than equity.

  1. AInterest on debentures is a charge against profit and is tax deductible, whereas dividend on equity shares is an appropriation of profitCorrect
  2. BDebenture holders have voting rights in the general meeting like equity shareholders
  3. CInterest on debentures is payable only if the company earns profit
  4. DDebentures increase the equity base of the company

Explanation

Debenture interest is a fixed obligation charged to profit and is deductible for tax, while equity dividend is paid out of after-tax profit. Debenture holders are creditors without voting rights. Interest is payable regardless of profit, and debentures add to debt, not equity.

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