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A company issued 10,000, 10% debentures of ₹100 each at 10% premium, redeemable at par after 5 years. Tax rate 35%. The approximate cost of debt (Kd) is:
A8.00%
B5.50%
C6.50%
D4.28%
Answer & Solution
Correct answer: D. 4.28%
1. I = ₹10; NP = ₹110; RV = ₹100; n = 5; t = 35%.
2. Numerator = I(1−t) + (RV−NP)/n = 10×0.65 + (−10)/5 = 6.5 − 2 = ₹4.5.
3. Denominator = (100+110)/2 = ₹105. Kd = 4.5/105 ≈ 4.28%.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §5.3 Illustration 2_
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