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Difficulty: MediumPublic Limited Companies: Characteristics, Stock Listing, and Securities

In a Public Limited Company, how does the legal and financial position of a debenture holder differ from that of an ordinary shareholder?

  1. A debenture holder is a creditor who receives fixed interest regardless of company profitability.Answer
  2. B
    A debenture holder is a co-owner who receives variable dividends based on net annual profits.
  3. C
    A debenture holder possesses voting rights at the annual general meeting to elect directors.
  4. D
    A debenture holder is a residual claimant who receives remaining assets only after all equity shares are repaid during liquidation.

Answer

A debenture holder is a creditor who receives fixed interest regardless of company profitability.
Debentures represent loan capital raised by a Public Limited Company. Therefore, a debenture holder is a creditor of the company and is entitled to receive a fixed rate of interest, which is an expense that must be paid regardless of whether the company makes a profit or a loss. In contrast, ordinary shareholders are owners who receive variable dividends depending on declared profits.

Step-by-Step Solution

1
Identify the nature of debentures versus ordinary shares
Debentures represent borrowed money (loan capital), whereas ordinary shares represent ownership (equity capital).
Understanding the distinction between loan capital and equity capital determines the investor's legal relationship with the company.
2
Determine the financial reward structure for each security holder
Debenture holders earn a fixed interest rate as a financial expense of the business, which must be paid prior to dividend declarations and irrespective of profits. Ordinary shareholders receive dividends strictly out of residual profits.
Interest on debt is a fixed charge against income, whereas dividends are distributions of profit.

Key Concept

Debentures vs Ordinary Shares in Public Limited Companies
Estimated Time:1m 0s
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Topics

Public Limited Companies: Characteristics, Stock Listing, and Securities

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