G plc has in issue 6% debentures quoted at 85 ex int. The debentures are redeemable in 5 years time at a premium of 10% (a) What is the return to investors ( kd ) ? (b) What is the cost to the company if the rate of corporation tax is 30%?

(a) The return to investors (kd) can be calculated using the formula for yield to maturity (YTM) on a bond, which is the total return anticipated on a bond if it is held until it matures.

The formula for YTM is:

YTM = [C + (F - P)/n] / [(F + P)/2]

Where: C = annual coupon payment (6% of face value of £100) F = face value of the bond (£100) P = purchase price (85% of £100) n = years to maturity (5 years)

Substituting the values into the formula:

YTM = [(6 + (100 - 85)/5)] / [(100 + 85)/2] = 7.94%

So, the return to investors (kd) is 7.94%.

(b) The cost to the company can be calculated as the after-tax cost of debt, which is the interest paid on the debt less any tax savings resulting from the tax-deductible interest payment.

The formula for the after-tax cost of debt is:

After-tax cost of debt = kd * (1 - Tax Rate)

Substituting the values into the formula:

After-tax cost of debt = 7.94% * (1 - 30%) = 5.56%

So, the cost to the company is 5.56%.