Question

a company willing to issue1000, 7percent debentures (irredemable) 100 each and for which the company will have to issue to incur the following expenses underwriting Commission 1.5% ,brokerage 0.5% printing and other expenses 500 find out cost of capital

Answer 1

one thing please that in the question you have written irredemable .....but it should be redeemable because redeemable means payment....is it written in the question or is it a typing mistake???

Answer 2

Explanation:

Interest payable = (Face value × Rate of interest)÷100

= (100×7)÷100 = Rs. 7

Expenses on issue:

I) Underwriting Commission =(100×1.5)÷100= rs. 1.5

II) Brokerage =(100×0.5)= rs. 0.5

III) Printing and other charges =500÷1000= rs. 0.5

Total expenses= Rs. 2.50

Net proceeds(NP)= Face value - Expenses on issue

= 100- 2.50 = Rs. 97.50

cost of debt capital kd (before tax) = (IP ×100)÷ NP

(7×100)÷97.50= 7.18%