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.

BTCD=15/100=15%

2.Debt issued and redeemed at discount or at a premium & Cost of existing debt.

BTCD = I + RV-NP/N

             ____________

             RV+NP/2

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.

BTCD= 12+100-100/5/100+100/2=12%