Abc plc has in issues, 13%of 600m irredeemable debenture valued at 85% , interest is due for payment within the next three, corporate tax is 30%.calculate the cost of debenture?
To calculate the cost of the debenture, we need to consider the interest payments and the corporate tax.
Step 1: Calculate the interest payments.
The interest on the debenture is 13% of £600 million, which is £78 million.
Step 2: Calculate the corporate tax.
The corporate tax rate is 30%, so the tax on the interest payments is 30% of £78 million, which is £23.4 million.
Step 3: Calculate the net interest.
The net interest is the interest payments minus the corporate tax, which is £78 million - £23.4 million = £54.6 million.
Step 4: Calculate the cost of the debenture.
The cost of the debenture is the net interest divided by the debenture's value.
The debenture's value is 85% of £600 million, which is £510 million.
Therefore, the cost of the debenture is £54.6 million / £510 million = 0.107 or 10.7%.