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What the after tax cost of capital for the debentures

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Question - The capital structure of a company during the whole of this current financial year has been as follows:

Ordinary Shares $1 fully paid - market value $800,000

6% debentures ($100 par value) $212,000

8% Unsecured Notes ($100 par value) $306,000

Last year's dividends for the company was 8 cents and this rate is expected to grow at a rate of 5% p.a.

The market value of the company's ordinary shares is $2 per share.

The market value of the debentures is $106; redeemable at par in 5 years.

The market value of the notes is $102; redeemable at par in 3 years.

The company tax rate is 30%.

What the after tax cost of capital for the debentures?

a. 6.00%

b. 4.63%

c. 3.24%

d. 4.20%

Reference no: EM133039859

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