Tax relief

Debt interest reduces the profit liable to tax and is therefore saving tax for the company.

So for example if a company has to pay 6 dollars interest every year and they have to pay tax on it lets say 2 dollars, then does that mean they only pay 4 dollars to the debenture holders?

No it does not. Suppose the tax rate is 20%. If the company makes a profit before interest of $100 then if there was no interest payable they would pay tax of $20. If the same company made profit before interest of $100 but had to pay interest of $10, then the taxable profit would be $90 and the tax payable would be $18. Because of the debt interest they have saved tax of $2 (which is 20% x the interest of $10), and so the net cost to the company of the interest is only $8. The debenture holders will receive the full interest of $10 (we always ignore personal tax in Paper FM).

Thank you for the clear explanation.

You are welcome :-)