(a) Differentiate between shares and debentures.
(b) Identify any four problems encountered by firms in raising capital,
Explanation
(a) A share is the smallest unit into which the capital of a company is divided. It is a unit of ownership of a business concern.
It is usually expressed in terms of money-capital. Shares can take different forms.
A shareholder receives dividend when the company makes and declares profit. He also has a voting right.
While a debenture is a loan capital or corporate bond. A debenture holder is a creditor to the company.
He receives interest on his capital whether or not the company makes profit.
(b) Problems encountered by firms in raising capital
(i) Low level of loanable funds for investment The level of
capital that firms can raise is therefore low.
(ii) Inability of firms to provide the required collateral securities to obtain loans from financial Institutions limits their ability to raise capital.
(iii) Underdeveloped money and capital markets also reduces the ability of firms to raise capital.
(iv) High cost of loans/hi9h interest rates. The interest charged by the financial institutions on loans is high
This discourages investors from borrowing from banks
(v) Inadequate demand reduces the level of profits which could have been ploughed back.
(vi) The risk involved and the fluctuating of share prices discourages some people from subscribing to the shares of companies.
This reduces the ability of firms to raise capital.
(vii) Lack of trust, poor business experience and practices make it extremely difficult for indigenous businessmen to obtain bank loans.
(viii) Government financial regulations which are sometimes very stringent, make it quite difficult for businessmen to obtain necessary funds and approval required to start their businesses.
(ix) High rate of default in repayments makes lenders reluctant in advancing loans to a good number of indigenous businessmen, who of course, could not start any business without such assistance given at appropriate time.
(x) High cost of production reduces the level of profits which could have been ploughed back