ABC plc has in issue,13% $600m irredeemable debentures currently valued at 85%.interest is due for payment within the next three weeks.corporate tax is 30%.calculate the cost of the debentures capital

Answer 1

To calculate the cost of the debenture capital, we need to consider the interest payment and the tax rate.

1. Calculating the interest payment:
Interest payment = Debenture amount * Interest rate
Interest payment = $600m * 13% = $78m

2. Calculating the tax shield:
Tax shield = Interest payment * Tax rate
Tax shield = $78m * 30% = $23.4m

3. Calculating the net payment after tax:
Net payment after tax = Interest payment - Tax shield
Net payment after tax = $78m - $23.4m = $54.6m

4. Calculating the cost of debentures capital:
Cost of debentures capital = Net payment after tax / Debenture value
Cost of debentures capital = $54.6m / ($600m * 85%)
Cost of debentures capital = $54.6m / $510m
Cost of debentures capital ≈ 0.107 or 10.7%

Therefore, the cost of the debentures capital is approximately 10.7%.