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How to calculate cost of capital with tax rate?
The solution is as follows −
Cost of debt=(Interest+(redemptionvalueofdebenture–issueprice)/maturityyear)(1−taxrate)(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+(110–80)/2)(1−0.42))(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%
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