How to calculate cost of capital with tax rate?

Banking & FinanceFinance ManagementGrowth & Empowerment

Solution

The solution is as follows −

  • Cost of debt=(Interest+(redemptionvalueofdebentureissueprice)/maturityyear)(1taxrate)(redemptionvalueofdebenture+issueprice)/2=(Interest+(redemptionvalueofdebenture–issueprice)/maturityyear)(1−taxrate)(redemptionvalueofdebenture+issueprice)/2

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

Cost of debt ==(12+(11080)/2)(10.42))(110+80)/2=(12+(110–80)/2)(1−0.42))(110+80)/2

Cost of debt ==15.6695=15.6695

Cost of debt = 16.48%

  • Cost of preference capital

    =(dividendspershare+(netprice(issuepricefloationcost)/redemptionperiod(netprice(issuepricefl

raja
Published on 26-Sep-2020 13:13:18
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