Theory question 109
Business Organisations(a) Differentiate between shares and debentures.
(b) Identify any four problems encountered by firms in raising capital.
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(a) Shares are units of ownership in a company; shareholders are owners, receive dividends that vary with profit and (ordinary shareholders) can vote. Debentures are long-term loans to a company; holders are creditors, receive fixed interest whether or not there is profit, are repaid first if the company is wound up, and have no voting rights.
(b) Any four: high interest rates; lack of collateral; poor/undeveloped capital market; small size and poor reputation of the firm; strict lending conditions of banks; low savings in the economy; poor records and accounts; political and economic instability discouraging investors; limited liability rules (for sole traders and partnerships, cannot sell shares).
Shareholders are owners; debenture holders are lenders.