Final answer:
The cost of debt capital when issuing 50,000 at 8% debentures at a discount of 5% with a tax rate of 50% is approximately 4.21%, which means option c. 4.2% is the correct answer.
Step-by-step explanation:
The question is asking to calculate the cost of debt capital when a company issues 50,000 at 8% debentures at a discount of 5% and the tax rate is 50%. The cost of debt capital is an important concept in corporate finance and involves understanding how the discount and the tax rate affect the overall cost of issuing debt.
To calculate the cost of debt, the formula is: Cost of debt = (Interest rate × (1 - Tax rate)) / (Net proceeds from issuing the debt / Face value of the debt). In this case, the face value of the debt is $50,000, the discount is 5% (which means the net proceeds are 95% of the face value), the interest rate is 8%, and the tax rate is 50%. Thus, the cost of debt would be (0.08 × (1 - 0.5)) / (0.95), which calculates to ~0.0421 or 4.21%. This means option c. 4.2% is the closest correct answer.