An issue of debenture plays a great role in long-term planning and decision-making. Debentures are a source of finance mainly suited for companies that have a constant source of earnings to service the debt. In a modern competitive business era, every company needs funds for any business opportunity. Both corporations and governments frequently issue debentures to raise capital or funds. This financing can be fulfilled only by issuing the owner’s capital and debt capital.
The issue of debenture, in one side creates the obligation for the payment of interest at a fixed rate and in another side, it causes an increase in ‘ earning per share’ due to comparatively less number of shares issued. Debentures as a source of finance suit companies which have regular earnings to service the debt, have higher proportion of fixed assets in their assets structure which offers adequate security and motivates investors.
The following points are being produced for its importance:
(1) Debentures holders or suppliers of loan capital have no controlling interest in the company.
(2) Debentures are important to pay interest expenses by a fixed rate.
(3) Finance is available for a fixed period with certainly and thus the company can adjust its investment plans suitably by taking into account the funds available.
(4) Debentures are important to meet the requirement of long-term capital budgeting.
(5) Debentures enhance the earnings of equity holders through the operation of financial leverage.
(6) Debentures help to maximize earning per share. Earnings per share can be maximized because of the benefit of financial leverage
(7) It helps to mobilize public savings and funds in the form of investment. In depressed market conditions debentures plays an important role in providing a good source of finance for a company and is beneficial to the investors.
(8) Debenture is less costly source of financing for the company. Cost of debenture is lower than the cost of equity. Debentures help to reduce the burden of income tax, since interest is charged against profit and loss account.
(9) Debenture is a most suitable form of long term source of financing. It provides long-term finance to company on easy and cheap terms. The cost of debt is lower than cost of equity or preference shares as interest is tax deductible.
(10) Debentures provide the way, to use leverage in the capital structure of the company.
(11) Debenture helps in mobilization of savings from public particularly from those investors who are risk aversive.
(12) Debenture helps to minimize the tax burden of the firm because the amount of interest is deducted from the income.