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A company issues 5000, 12% debentures of 100 each at a discount of 5% . the commission payable to underwriters and brokers is rs 25000. the debentures are redeemable after 5 years. compute the after -tax cost of debt assuming a tax rate of 50%?
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A company issues 5000, 12% debentures of 100 each at a discount of 5% ...
Calculation of After-Tax Cost of Debt

Issued Debentures: 5000
Face Value of Debentures: Rs. 100
Discount on Debentures: 5%
Commission Payable: Rs. 25000
Redemption Period: 5 years
Tax Rate: 50%

1. Calculating the Net Proceeds from Debenture Issue

Face Value per Debenture = Rs. 100
Discount on Debentures = 5%
Discount per Debenture = Rs. 5
Net Proceeds per Debenture = Rs. 95
Total Net Proceeds from Debenture Issue = 5000 x 95 = Rs. 4,75,000

2. Calculating the Cost of Debt

Cost of Debt = (Interest Expense / Net Proceeds) x 100
Interest Expense = Face Value x Interest Rate
Interest Rate = 12%

Face Value = Rs. 100
Interest Rate = 12%
Interest Expense per Debenture = 100 x 12% = Rs. 12
Total Interest Expense = 5000 x 12 = Rs. 60,000
Cost of Debt = (60,000 / 4,75,000) x 100 = 12.63%

3. Calculating the After-Tax Cost of Debt

After-Tax Cost of Debt = Cost of Debt x (1 - Tax Rate)

Cost of Debt = 12.63%
Tax Rate = 50%

After-Tax Cost of Debt = 12.63% x (1 - 50%) = 6.315%

Conclusion

The after-tax cost of debt for the company is 6.315%. This means that the company has to pay 6.315% interest on its debentures after taking into account the tax benefits.
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A company issues 5000, 12% debentures of 100 each at a discount of 5% . the commission payable to underwriters and brokers is rs 25000. the debentures are redeemable after 5 years. compute the after -tax cost of debt assuming a tax rate of 50%?
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