Pautas ética APA

1. Define the term debenture

Debentures are long-term loans with a fixed interest rate, to be repaid at some future date, issued to a broad range of investors through a financial intermediary. They are bonds issued by companies.

1. Define the term share capital

Share capital is a type of external source of finance where a company issues shares in order to gain instant capital through a financial market. They have no interest payments and the business will have to give dividends to their shareholders.

1. Analyze one advantage and one disadvantage to the company, of Asif providing finance in the form of debenture

One advantage for the company is the fact that debentures provide fixed interest rates, which can reduce uncertainty. Fixed interest rates are not subject to change due to market fluctuations, this can provide a sense of security for the business as their interest rate will not change unexpectedly. In this case, Asif’s cousin’s business will benefit from a debenture as an external source of finance since they will keep constant interest rates. However, these interest rates tend to be higher, which is a disadvantage for the company. Usually, debenture interest rates are higher than bank interest rates since it is easier to obtain for businesses. Financial institutions usually employ an adhocracy in the process of giving bonds, which is easier for businesses to obtain. However, the bond market usually applies higher interest rates, which is more costly for businesses. In this case, Asif’s cousin’s business might have a hard time paying these high-interest rates if their expansion plan doesn’t work out and take a greater toll on long-term cash flow.

1. Discuss whether Asif should provide the finance as share capital or as a debenture

Asif is a successful entrepreneur who likes to be in control of his business. His cousin has offered him shares in his privately held company, which manufactures textiles. in order to raise capital to expand his business. Asif is unsure whether to buy shares or offer him finance in the form of a debenture.

One factor that could influence his decision is control. On one side, choosing share capital in order to invest in a business, gives the shareholder more control over this business. This is because when purchasing a large percentage of a company's shares, shareholders get the chance to be part of the business's board of directors. They get the opportunity to participate in important business decisions. In this case, since Asif enjoys being in control of his businesses, purchasing 10% of the company’s shares will get him a major part of the board of directors, giving him the chance to take some control. On the other hand, investing in the form of a debenture doesn’t grant control or participation in a company. This is because debentures have forms of bonds, which is an exchange where the investor receives his investment back along with fixed interest rates. Granting them no direct relationship with the business and therefore, no control. In this case, since Asif dislikes not having control of his businesses, it might not be advantageous for him to invest in the form of debentures, he will get any participation in the business's operations.

Another factor that could influence his decision is the level of certainty. On one hand, debentures provide high levels of certainty for Asif due to collaterals. Debentures require some sort of collateral in order to reduce risk for the investor in case the business might not be able to pay their loan back, these are usually made from non-current assets. This provides certainty that investors will not risk their capital to the business, and they will receive their money back whether it will be from the payment from the business or their collateral. In this case, Asif has a higher degree of certainty since it can be assumed that if he decides to invest in the form of a debenture, the collateral will reduce the risk of losing his capital, which is advantageous. On the other hand, the use of share capital can provide a lower sense of certainty for investors. When buying shares, the business as a payback allocates a portion of their profits in the form of dividends for their shareholders. If the business does not produce profits, they will not be able to provide their shareholders with dividends. This implies that the investor’s returns will solely depend on the business's success, which is not guaranteed. In this case, if Asif’s cousin's business succeeds and earns profits, he will earn dividends which will benefit him in the long run. However, the risk of failure is high due to the fact that there are larger competitors in the market that can prevent them from expanding and ultimately earning profits, which might lead to the loss of Asif’s investment.

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