Home › CA Inter › Financial Management › Cost of Debt › Cost of irredeemable debentures is given by:
Cost of irredeemable debentures is given by:
A(I / NP) × (1 − t)
BI / NP
C[I(1−t) + (RV−NP)/n] / [(RV+NP)/2]
DNP × I
Answer & Solution
Correct answer: A. (I / NP) × (1 − t)
1. Kd (irredeemable) = (I / NP) × (1 − t).
2. I = annual interest; NP = net proceeds; t = tax rate.
3. Tax shield reduces effective cost.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §5.2_
Related questions
If a company issues 10% debentures of ₹100 at par, tax rate 25%, the after-tax cost of debIn the YTM (Present Value) approach to cost of redeemable debt:A bond pays ₹10 annual coupon (10% of face ₹100), Net Proceeds ₹90, redeemable at par in 5In the Cost of Debt formula, the tax-shield (1 − t) is applied because:A company issued 10,000, 10% debentures of ₹100 each at 10% premium, redeemable at par aftA company issued 12% irredeemable debentures with current market price ₹94 and tax rate 35