A company has issued 10 percent perpetual debt of ₹ 1 lac at 5 percent premium. If tax rate is 30…
For a 10% perpetual debt of ₹ 1,00,000 issued at a 5% premium, annual interest (I) = ₹ 10,000 and Net Proceeds (NP) = ₹ 1,00,000 + ₹ 5,000 = ₹ 1,05,000. With a corporate tax…
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A company has issued 10 percent perpetual debt of ₹ 1 lac at 5 percent premium. If tax rate is 30 percent, then the cost of debt will be :
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Correct answer C
For a 10% perpetual debt of ₹ 1,00,000 issued at a 5% premium, annual interest (I) = ₹ 10,000 and Net Proceeds (NP) = ₹ 1,00,000 + ₹ 5,000 = ₹ 1,05,000. With a corporate tax rate (t) of 30% (0.30), the after-tax Cost of Irredeemable Debt (K_d) = [I × (1 - t) / NP] × 100 = [10,000 × (1 - 0.30) / 1,05,000] × 100 = (7,000 / 1,05,000) × 100 = 6.66%.
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UGC NET Commerce