Calculate cost of capital for the following with income tax rate 42%. a) Company X issued 10% debenture with face value Rs.125 each and issue price is Rs.80 per debenture. Maturity period is 2 years with 8% premium. b) Company Y issued 12% preference share with face value Rs.150 each and issue price is Rs.80 per share. Maturity period is 15 years at par.

Solution

The solution is as follows −

Cost of debt $= \frac{(I n t e r e s t + (r e d e m p t i o n v a l u e o f d e b e n t u r e - i s s u e p r i c e) / m a t u r i t y y e a r) (1 - t a x r a t e)}{(r e d e m p t i o n v a l u e o f d e b e n t u r e + i s s u e p r i c e) / 2}$

Interest = 12
Redemption value = 110
Issue price = 80
Tax rate = 42% => 0.42
Maturity year = 2 years

Cost of debt = $= \frac{(12 + (110 - 80) / 2) (1 - 0.42))}{(110 + 80) / 2}$

Cost of debt = $= \frac{15.66}{95}$

Cost of debt = 16.48%

Cost of preference capital
$= \frac{(d i v i d e n d s p e r s h a r e + (n e t p r i c e - (i s s u e p r i c e - f l o a t i o n c o s t) / r e d e m p t i o n p e r i o d}{(n e t p r i c e - (i s s u e p r i c e - f l o a t i o n c o s t) / 2}$

Published on 26-Sep-2020 16:43:18