MST531: Cost of Debt

Lecture 18
 Cost of Debt
1: Irredeemable Debt

INT
kd  i 
B0
Cost of Irredeemable Debt
Illustration-1:
A company issued Rs.
2,00,000 10% irredeemable
debentures at par. Calculate
the cost of debt.
Cost of Debt: At Par- Illustration

INT
kd  i 
B0
Cost of Irredeemable Debt
Illustration-2:
A company issued Rs.
2,00,000 8% irredeemable
debentures at a discount of
5%. If the tax rate is 40%,
calculate the cost of debt.
Cost of Irredeemable Debt
Cost of Irredeemable Debt
Illustration-3:
A company issued Rs.
2,00,000 9% irredeemable
debentures at a premium of
5%. If the tax rate is 60%,
calculate the cost of debt.
 Cost of Irredeemable Debt
Illustration-3:
𝑩𝟎 = 𝑹𝒔 𝟐, 𝟎𝟎, 𝟎𝟎𝟎 ∗ 𝟏 + 𝟎. 𝟎𝟓 = 𝑹𝒔 𝟐, 𝟏𝟎, 𝟎𝟎𝟎
𝐍𝐞𝐭 𝐏𝐫𝐨𝐜𝐞𝐞𝐝𝐬 = 𝐁𝟎 = 𝐑𝐬 𝟐, 𝟏𝟎, 𝟎𝟎𝟎
𝑰𝑵𝑻 = 𝑹𝒔 𝟐, 𝟎𝟎, 𝟎𝟎𝟎 ∗ 𝟎. 𝟎𝟗 = 𝑹𝒔 𝟏𝟖, 𝟎𝟎𝟎
𝐑𝐬 𝟏𝟖, 𝟎𝟎𝟎
𝐁𝐞𝐟𝐨𝐫𝐞 𝐓𝐚𝐱 𝐂𝐨𝐬𝐭 = ∗ 𝟏𝟎𝟎 = 𝟖. 𝟓𝟕%
𝐑𝐬 𝟐, 𝟏𝟎, 𝟎𝟎𝟎

𝐀𝐟𝐭𝐞𝐫 𝐓𝐚𝐱 𝐂𝐨𝐬𝐭 𝐨𝐟 𝐂𝐚𝐩𝐢𝐭𝐚𝐥

= 𝟖. 𝟓𝟕 ∗ 𝟏 − 𝟎. 𝟔 = 𝟑. 𝟒𝟐𝟖%
Thank you

Prof. Narinder Verma

School of Business Management and Liberal Arts
Shoolini University
Village Bajhol, Solan (H.P)

+91 9816080528
narinderverma@shooliniuniversity.com