A Company Ltd. issued Rs. 100 lakhs 14% Debentures of Rs. 100 each. Tax rate is 40%. Calculate cost of…
The after-tax cost of debt is after-tax interest divided by net issue proceeds. Issued at a 10% premium, each debenture brings Rs. 110, and a 5% floatation cost on that…
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A Company Ltd. issued Rs. 100 lakhs 14% Debentures of Rs. 100 each. Tax rate is 40%. Calculate cost of debt with 10% premium and 5% floatation cost on the issue price, to two decimal places.
Answer and explanation
Correct answer A
The after-tax cost of debt is after-tax interest divided by net issue proceeds. Issued at a 10% premium, each debenture brings Rs. 110, and a 5% floatation cost on that price leaves Rs. 110 × 0.95 = Rs. 104.50; after-tax interest is Rs. 14 × 0.60 = Rs. 8.40. The cost of debt is 8.40 ÷ 104.50 × 100 = 8.0383%, or 8.04% to two decimal places.
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Maharashtra and Goa SET (MH SET)