A company issues 10 % debenture at face value of Rs 100, which will be redeemed at Rs 110 after 10 years .Calculate cost of capital.Options :7.27%8%10.47%7.8%
Question
A company issues 10 % debenture at face value of Rs 100, which will be redeemed at Rs 110 after 10 years .Calculate cost of capital.Options :7.27%8%10.47%7.8%
Solution
To calculate the cost of capital, we need to use the formula for the cost of debt, which is:
Cost of Debt = (Interest Expense + (Redemption Value - Issue Price) / Life of the Debenture) / (Redemption Value + Issue Price) / 2
Here, the Interest Expense is 10% of Rs 100, which is Rs 10. The Redemption Value is Rs 110, the Issue Price is Rs 100, and the Life of the Debenture is 10 years.
So, the cost of debt is:
= (10 + (110 - 100) / 10) / (110 + 100) / 2 = (10 + 1) / (210 / 2) = 11 / 105 = 0.10476 or 10.476%
So, the cost of capital is 10.47%. Therefore, the correct option is 10.47%.
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