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 understand the formula first. The cost of debt is calculated as:
Cost of Debt = (Interest Expense / Net Proceeds) * 100
Here, the interest expense is the annual interest on the debentures, which is 10% of Rs. 100000 = Rs. 10000.
The net proceeds are the amount the company receives from issuing the debentures. Since the debentures are issued at a discount of 10%, the company receives 90% of Rs. 100000 = Rs. 90000.
Now, we can substitute these values into the formula:
Cost of Debt = (10000 / 90000) * 100 = 11.1%
So, the cost of debt is 11.1%.
Similar Questions
A company issues 10 % debenture at face value of Rs 100, which will be redeemed at Rs 110 after 10 years .Calculate cost of capital.Options :7.27%8%10.47%7.8%
A company has to redeem debentures of ` 10,00,000 at the end of 3 years from now. How much money should the company accumulate every year at 10% interest rate?
What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16% return?
A company’s bank requires a compensating balance of 20% on a $100,000 loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?
A machine is depredated at a rate of 10% on reducing balance the original coast was RS. 10,000, after how many years it will be valued at Rs.6561
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.