(a) Differentiate between shares and debentures.... | WAEC SSCE - Economics - 2011 (Essay)

Question 1 Report

(a) Differentiate between shares and debentures.
(b) Identify any four problems encountered by firms in raising capital,

Answer

(a) Difference between shares and debentures:

Shares	Debentures
A share is a unit of the ownership capital of a company; the holder is a part-owner (member).	A debenture is a unit of a loan to a company; the holder is a creditor, not an owner.
Shareholders earn a dividend, which varies with profit and is not guaranteed.	Debenture holders earn a fixed rate of interest, payable whether or not profit is made.
Shareholders have voting rights and control the company.	Debenture holders have no voting rights in ordinary matters.
In liquidation, shareholders are paid last.	Debentures are often secured and are repaid before shareholders.

(b) Four problems firms encounter in raising capital:

Poorly developed capital market: A weak or narrow stock exchange makes it hard to float shares and stocks.
Low level of savings and incomes: Widespread poverty means few people can buy shares or lend to firms.
Lack of collateral security: Small firms cannot provide the security banks require for loans.
High interest rates and lender caution: Costly borrowing and the reluctance of banks to lend to risky ventures limit access to funds. (Ignorance of company procedures and lack of confidence in some firms also discourage investors.)

Answer Details

(a) Difference between shares and debentures:

Shares	Debentures
A share is a unit of the ownership capital of a company; the holder is a part-owner (member).	A debenture is a unit of a loan to a company; the holder is a creditor, not an owner.
Shareholders earn a dividend, which varies with profit and is not guaranteed.	Debenture holders earn a fixed rate of interest, payable whether or not profit is made.
Shareholders have voting rights and control the company.	Debenture holders have no voting rights in ordinary matters.
In liquidation, shareholders are paid last.	Debentures are often secured and are repaid before shareholders.

(b) Four problems firms encounter in raising capital:

Poorly developed capital market: A weak or narrow stock exchange makes it hard to float shares and stocks.
Low level of savings and incomes: Widespread poverty means few people can buy shares or lend to firms.
Lack of collateral security: Small firms cannot provide the security banks require for loans.
High interest rates and lender caution: Costly borrowing and the reluctance of banks to lend to risky ventures limit access to funds. (Ignorance of company procedures and lack of confidence in some firms also discourage investors.)

(a) Differentiate between shares and debentures. (b) Identify any four problems encountered by firms in raising capital,