Calculate the cost of debt if the company issues Rs.100000, 10% debentures at a discount of 10%.Options :7.27%8%9.52%11.1%
Question
Calculate the cost of debt if the company issues Rs.100000, 10% debentures at a discount of 10%.Options :7.27%8%9.52%11.1%
Solution
To calculate the cost of debt, we need to consider the interest expense and the net proceeds from the issue of debentures.
Step 1: Calculate the interest expense. The interest expense is the face value of the debentures multiplied by the coupon rate. In this case, it is Rs.100000 * 10% = Rs.10000.
Step 2: Calculate the net proceeds from the issue of debentures. The net proceeds are the face value of the debentures minus the discount. In this case, it is Rs.100000 - Rs.100000 * 10% = Rs.90000.
Step 3: Calculate the cost of debt. The cost of debt is the interest expense divided by the net proceeds, then multiplied by 100 to get a percentage. In this case, it is (Rs.10000 / Rs.90000) * 100 = 11.1%.
So, the cost of debt is 11.1%.
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