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-   -   How to calculate cost of debenture (https://www.askmehelpdesk.com/showthread.php?t=463445)

  • Apr 8, 2010, 12:23 PM
    surbhi2
    how to calculate cost of debenture
    a company issues new debenture of rs. 2 million at per the net proceeds being rs. 1.8 million it has a 13.5% rate of interest and 7 year maturity. The company' tax rate is 52%. What is the cost of debenture issue? What will be cost in 4 years if market value of debentures at that time is rs. 2.2 million?
  • Apr 10, 2010, 08:38 PM
    babudeo
    Hi,
    I have tried following way... I am not sure if it is correct... somebody please sugest-----

    (a)
    I(1—T) + {(F—P)/n}
    Kd =---------------------------------
    (F+P)/2

    Where Kd is post tax cost of debenture capital,
    I is the annual interest payment per unit of debenture,
    T is the corporate tax rate,
    F is the redemption price per debenture,
    P is the net amount realized per debenture,
    n is maturity period


    13.5(1—0.52) + (2—1.8)/7 13.5*.48+.2/7 6.51
    ------------------------------------- = -------------------------- = ----------- = 3.43
    (2+1.8)/2 1.9 1.9

    (b) 13.5(1-.52)+(2-2.2)/4 13.5*.48-.2/4
    ---------------------------= ------------------- =6.43/.21 =3.06
    (2+2.2)/2 2.1

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