Discuss any 2 advantages and 2 disadvantages of raising finance by issue of debentures.

Advantages of raising finance by issue of debentures are: (i) The cost of debentures is much lower than the cost of preference or equity capital as the interest is tax-deductible. Also, investors consider debenture investment safer than equity or preferred investment and, hence, may require a lower return on debenture investment. (ii) Debenture financing does not result in dilution of control. (iii) In a period of rising prices, debenture issue is advantageous. The fixed monetary outgo decreases in real terms as the price level increases. In other words, the company has to pay a fixed rate of interest. Disadvantages of debenture financing are: (i) Debenture interest and the repayment of its principal amount is an obligatory payment. (ii) The protective covenants associated with a debenture issue may be restrictive. (iii) Debenture financing enhances the financial risk associated with the firm because of the reasons given in point (i) . (i) Since debentures need to be paid at the time of maturity, a large amount of cash outflow is needed at that time.