Cost of Debt

[Dagabie]

Hi frankmudiaga,

I agree with the answer given by Siddharth.

That formula is used for redeemable securities like bonds.

The IRR formula is used mostly for redeemable Preference shares

[knightwolf]

Hi,

the formula to find the cost of redeemable debt is

K = (Interest * (100 - Tax Rate) + (Redeemable value of debt - Net Proceeds)/N)/(Redeemable value of debt + Net Proceeds)/2

Net Proceeds - Money raised through issue - Cost involved in issue of debenture

So for your question

K = (12*(100 - 30 )+(100-100)/5)/(100+100)/2)

K = (12*70)+0)/100

K = 8.4 %

[knightwolf]

Hello Sir,
Please forward this question to my mail