Question
Cost of Redeemable Debentures (using approximation method) The cost of redeemable debentures will be calculated as below: I(1-t)+RV-NP/N RV+NP/2 Where, I = Interest payment NP
Cost of Redeemable Debentures (using approximation method)
The cost of redeemable debentures will be calculated as below:
I(1-t)+RV-NP/N
RV+NP/2
Where,
I
=
Interest payment
NP
=
Net proceeds from debentures in case of new issue of deb or Current
market price in case of existing debt.
RV
=
Redemption value of debentures
t
=
Tax rate applicable to the company
n
=
Life of debentures.
The above formula to calculate cost of debt is used where only interest on debt is tax
deductable. Sometime, debts are issued at discount and/ or redeemed at a premium.
If discount on issue and/ or premium on redemption are tax deductible, the following
formula can be used to calculate the cost of debt
Q : CAN YOU EXPLAIN THE WHOLE ABOVE FORMULA WITH THE LOGIC
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Financial Accounting
Authors: Carl S. Warren, Christine Jonick, Jennifer Schneider
16th Edition
1337913103, 9781337913102
