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ABC Ltd. wishes to issue 1000 7% debentures of $100 each for which the expenses of...

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sjamil912 | eNoter

Posted May 24, 2013 at 5:54 AM via web

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ABC Ltd. wishes to issue 1000 7% debentures of $100 each for which the expenses of issue would be $5 per debenture .Find out the cost of debenture capital.

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ramakrishnan | Middle School Teacher | (Level 1) Adjunct Educator

Posted May 24, 2013 at 11:21 AM (Answer #1)

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Computation of cost of debenture capital.

Issue Proceeds from 1000 7% debentures of $100           $100,000

Less : Cost of issue of debentures @ $5 per debenture    $    5,000

Net Proceeds from 1000 7% debentures of $100             $   95,000

Interest Cost @7%                                                      $    7,000

Total Cost of Debenture Capital  ($5,000 + $ 7,000)       $   12,000

Cost of Debenture Capital (%)   =    ($12,000/ $95,000) x 100 = 12.6316%                      

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