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
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%.