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A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. 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 5,000 12% debentures of 100 each at discount of 5%. T...
Understanding the Cost of Debt
When a company issues debentures, the cost of debt is crucial for evaluating the financial implications of borrowing. Here, we will compute the after-tax cost of debt based on the given data.
1. Details of the Debenture Issue
- **Number of Debentures:** 5,000
- **Face Value per Debenture:** 100
- **Coupon Rate:** 12%
- **Discount Rate:** 5%
- **Commission Payable:** 25,000
- **Redemption Period:** 5 years
- **Tax Rate:** 50%
2. Calculate the Total Amount Raised
- **Total Face Value:** 5,000 debentures * 100 = 500,000
- **Total Discount:** 5% of 500,000 = 25,000
- **Net Amount Raised:** 500,000 - 25,000 = 475,000
- **Total Cost Including Commission:** 475,000 + 25,000 = 500,000
3. Calculate Annual Interest Payment
- **Annual Interest Payment:** 12% of 500,000 = 60,000
4. Calculate the Effective Cost of Debt
- **Effective Cost of Debt:** (Annual Interest Payment / Net Amount Raised) * 100
- **Effective Cost of Debt:** (60,000 / 475,000) * 100 = 12.63%
5. Calculate After-Tax Cost of Debt
- **After-Tax Cost of Debt Formula:** Effective Cost of Debt * (1 - Tax Rate)
- **After-Tax Cost of Debt:** 12.63% * (1 - 0.50) = 12.63% * 0.50 = 6.315%
Conclusion
The after-tax cost of debt for the company is approximately **6.32%**. This figure is essential for assessing the impact of borrowing costs on the company's overall financial performance.
When a company issues debentures, the cost of debt is crucial for evaluating the financial implications of borrowing. Here, we will compute the after-tax cost of debt based on the given data.
1. Details of the Debenture Issue
- **Number of Debentures:** 5,000
- **Face Value per Debenture:** 100
- **Coupon Rate:** 12%
- **Discount Rate:** 5%
- **Commission Payable:** 25,000
- **Redemption Period:** 5 years
- **Tax Rate:** 50%
2. Calculate the Total Amount Raised
- **Total Face Value:** 5,000 debentures * 100 = 500,000
- **Total Discount:** 5% of 500,000 = 25,000
- **Net Amount Raised:** 500,000 - 25,000 = 475,000
- **Total Cost Including Commission:** 475,000 + 25,000 = 500,000
3. Calculate Annual Interest Payment
- **Annual Interest Payment:** 12% of 500,000 = 60,000
4. Calculate the Effective Cost of Debt
- **Effective Cost of Debt:** (Annual Interest Payment / Net Amount Raised) * 100
- **Effective Cost of Debt:** (60,000 / 475,000) * 100 = 12.63%
5. Calculate After-Tax Cost of Debt
- **After-Tax Cost of Debt Formula:** Effective Cost of Debt * (1 - Tax Rate)
- **After-Tax Cost of Debt:** 12.63% * (1 - 0.50) = 12.63% * 0.50 = 6.315%
Conclusion
The after-tax cost of debt for the company is approximately **6.32%**. This figure is essential for assessing the impact of borrowing costs on the company's overall financial performance.
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A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. 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 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.?.
A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A company issues 5,000 12% debentures of 100 each at discount of 5%. The commission payable to underwriters and brokers is 25,000. The debentures are redeemable after 5 years. Compute the after-tax cost of debt assuming a tax rate of 50%.?.
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