Cost of Debt
Debentures,Bonds,Fixed deposits,Term loans ets..Debt may be issues and redeemed at par premium or discount.
1.Debt issued at par and redeemed at par/Cost of perpetual debt(irredeemable debt.)
The before tax cost of debt(BTCD) is simply the interest offered to the suppliers of money.
BTCD= Interest/Net proceeds.
Eg. A company issues 3 years debentures of Rs 100 at 15% coupon rate .Calculate BTCD.
2.Debt issued and redeemed at discount or at a premium & Cost of existing debt.
BTCD = I + RV-NP/N
RV= Redeemable value NP=Net proceeds from the issue.
N=Number of years I=Annual interest charges in rupees.
Eg. Wipro issues 5 years 12% debentures of Rs 100 each for Rs 105.The debentures are redeemed at par.The company has spend Rs 5 per debenture as flotation cost.