Beta Company Ltd issued 10% perpetual debt of Rs 1,00,000. The company's tax rate is 50%. Determine the…
For a 10% perpetual debt issued at a 10% premium, the net proceeds per Rs. 100 face value are Rs. 110 and annual interest is Rs. 10. Therefore, before-tax cost of debt K_db…
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Beta Company Ltd issued 10% perpetual debt of Rs 1,00,000. The company's tax rate is 50%. Determine the cost of capital (before tax as well as after tax) assuming the debt is issued at 10 percent premium.
Answer and explanation
Correct answer A
For a 10% perpetual debt issued at a 10% premium, the net proceeds per Rs. 100 face value are Rs. 110 and annual interest is Rs. 10. Therefore, before-tax cost of debt K_db = (10 / 110) x 100 = 9.09%, and with a 50% corporate tax rate, after-tax cost of debt K_da = 9.09% x (1 - 0.50) = 4.545% (4.54%).
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UGC NET Commerce