Question

a company issues rs 1000000, 12% debentures of rs 100 each. the debentures are reedemable fter the expiry of fixed period of 7 years. tax rate applicable to company is 30%. calculate cost of debt (after tax) if debentures are used : (1) at par (2) at 10% discount (3) at 10% premium​

Answer 1

Answer:

2757 is u answer it may help you

Answer 2

Given:

No. of debentures issued = 10,00,000

Interest Rate = 12%

No. of years = 7 years

Tax rate = 30%

To find:

Cost of debt

$kd \: = \frac {i + \frac{rv - np}{n} }{ \frac{rv + np}{2} } (1 - t)$

(1) At par:

i = interest on debentures = 100 × 12% = 12

rv = redeemable value = 100

np = net proceeds = 100

n = 7 years

t = tax rate = 0.30

$kd \: = \frac {i (1 - t)+ \frac{rv - np}{n} }{ \frac{rv + np}{2} }$

$kd \: = \frac {12 (1 - 0.3)+ \frac{100 - 100}{7} }{ \frac{100+ 100}{2} }$

$kd \: = \frac {12(0.7) + 0 }{ \frac{200}{2} }$

kd = 8.4 %

(2) At 10 % discount

i = interest on debentures = 100 × 12% = 12

rv = redeemable value = 100

np = net proceeds = 100 -10% = 90

n = 7 years

t = tax rate = 0.30

$kd \: = \frac {i (1 - t)+ \frac{rv - np}{n} }{ \frac{rv + np}{2} }$

$kd \: = \frac {12 (1 - 0.3)+ \frac{100 - 90}{7} }{ \frac{100+ 90}{2} }$

$kd \: = \frac {12(0.7) + \frac{10}{7} }{ \frac{190}{2} }$

kd = 10.35%

(3) At 10% premium

i = interest on debentures = 100 × 12% = 12

rv = redeemable value = 100

np = net proceeds = 100 +10% = 110

n = 7 years

t = tax rate = 0.30

$kd \: = \frac {i (1 - t)+ \frac{rv - np}{n} }{ \frac{rv + np}{2} }$

$kd \: = \frac {12 (1 - 0.3)+ \frac{100 - 110}{7} }{ \frac{100+ 110}{2} }$

$kd \: = \frac {12(0.7) + \frac{ - 10}{7} }{ \frac{210}{2} }$

kd = 6.64%

Solution:

1. At par kd= 8.4%
2. At 10 % discount = 10.35%
3. At 10 % premium =6.64%