A public limited company raises long-term corporate finance by issuing various financial instruments to investors. Which statement accurately describes the financial status and rights of debenture holders in a public limited company?
- They are creditors of the company who receive fixed interest payments regardless of whether the company makes a profit.Answer
- BThey are co-owners of the company who hold voting rights at general meetings and receive variable dividends.
- CThey receive dividends paid exclusively out of distributable profits and carry residual claims upon winding up.
- DThey exercise internal governance authority and possess the legal power to appoint board directors.
Answer
Debenture holders are creditors of the public limited company who receive fixed interest payments regardless of profit.
In a public limited company, debenture holders are lenders (creditors) rather than owners. Because debentures represent borrowed capital, the company is legally required to pay the agreed fixed rate of interest periodically as an expense, regardless of whether it registers a profit or a loss.
Step-by-Step Solution
Key Concept
Debentures as Loan Capital in Public Limited Companies