A company has 10% perpetual debt of Rs. 1,00,000. The tax rate is 35%. Which one of the following is…
For a 10% perpetual debt of face value Rs. 1,00,000 issued at a 10% premium, the annual interest (I) is Rs. 10,000 and the net proceeds (NP) are Rs. 1,00,000 × 1.10 = Rs.…
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A company has 10% perpetual debt of Rs. 1,00,000. The tax rate is 35%. Which one of the following is the after-tax cost of capital assuming that the debt is issued at 10% premium?
Answer and explanation
Correct answer B
For a 10% perpetual debt of face value Rs. 1,00,000 issued at a 10% premium, the annual interest (I) is Rs. 10,000 and the net proceeds (NP) are Rs. 1,00,000 × 1.10 = Rs. 1,10,000. Given a corporate tax rate (t) of 35%, the after-tax cost of perpetual debt (Kd) = [I × (1 − t)] / NP = [10,000 × (1 − 0.35)] / 1,10,000 = 6,500 / 1,10,000 = 0.05909, or 5.91%.
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UGC NET Commerce