Cost Of Capital Of Redeemable Debt
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COST OF CAPITAL OF REDEEMABLE DEBT
The cost of capital of redeemable debt may be ascertained with the help of equation.
n
Bo = ∑ Ii (1 – t)/ (1+ kd)i + COPi /(1+ kd)i + COPn / (1+ kd) n
i=1
where I = Annual Interest Payment
Bo = Net Proceeds
COP i = Regular cash outflow on account of amortization
COP n = Cash outflow on account of repayment at maturity
k d = After tax cost of capital of debt.
In case, the debt is repayable only at the time of maturity and there is no annual amortization then the equation will not contain the second element. The equation is to solved for the value of k d, which will be after tax cost of capital for debt. This equation is to solved by trail and error procedure.
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n
Bo = ∑ Ii (1 – t)/ (1+ kd)i + COPi /(1+ kd)i + COPn / (1+ kd) n
i=1
where I = Annual Interest Payment
Bo = Net Proceeds
COP i = Regular cash outflow on account of amortization
COP n = Cash outflow on account of repayment at maturity
k d = After tax cost of capital of debt.
In case, the debt is repayable only at the time of maturity and there is no annual amortization then the equation will not contain the second element. The equation is to solved for the value of k d, which will be after tax cost of capital for debt. This equation is to solved by trail and error procedure.
For more help in Cost of Capital of Redeemable Debt please click the button below to submit your assignment: