A firm issues debentures of Rs. 1,00,000 and realizes Rs.98,000 after allowing 2%
commission to brokers. Debentures carry interest rate of 10%. The debentures are
due for maturity at the end of 10th year at par. Calculate cost of debt.
Answers
Method # 1. Debt Issued at Par:
Method # 1. Debt Issued at Par:The method of computation for ascertaining cost of debt which is issued at par is comparatively an easy task. It is nothing but the explicit interest rate adjusted again for the tax liability.
Method # 1. Debt Issued at Par:The method of computation for ascertaining cost of debt which is issued at par is comparatively an easy task. It is nothing but the explicit interest rate adjusted again for the tax liability.Symbolically,
Method # 1. Debt Issued at Par:The method of computation for ascertaining cost of debt which is issued at par is comparatively an easy task. It is nothing but the explicit interest rate adjusted again for the tax liability.Symbolically,Example:
Method # 1. Debt Issued at Par:The method of computation for ascertaining cost of debt which is issued at par is comparatively an easy task. It is nothing but the explicit interest rate adjusted again for the tax liability.Symbolically,Example:A company has issued 8% debentures and the tax rate is 50%, the after tax cost of debt will be 4%. — It may be’ calculated as under:
Method # 1. Debt Issued at Par:The method of computation for ascertaining cost of debt which is issued at par is comparatively an easy task. It is nothing but the explicit interest rate adjusted again for the tax liability.Symbolically,Example:A company has issued 8% debentures and the tax rate is 50%, the after tax cost of debt will be 4%. — It may be’ calculated as under:Since interest is treated as an expense while calculating firm’s income for income- tax purpose, the tax is deducted out of the interest payable. This tax adjusted interest rate is used only where the EBIT (Earnings/Profits before Interest and Tax) is equal to or exceed the interest.
Answer:
Redeemable value = Rs.100, 000; Sale value
= Rs. 98,000. Annual interest (I) = Rs. 10,000
Cost of debt = ((10,000 + [100,000 - 98,000] / 10) / ((100,000 +
98,000) / 2))
Cost of debt (after tax) = 6.18%