How to calculate cost of capital with tax rate?

Solution

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%

• Cost of preference capital

  =(dividendspershare+(netprice–(issueprice−floationcost)/redemptionperiod(netprice–(issueprice−fl