CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Kaveri Industries has 10% perpetual debentures of face value ₹1,000, issued at par with no flotation cost. The tax rate is 30%. Which is the after-tax cost of this debt?
The after-tax cost of debt is 7%. The pre-tax cost equals interest of ₹100 over proceeds of ₹1,000, which is 10%, and the 30% tax rate reduces it by the interest tax shield to 10% x 0.70.
- A10.00%
- B13.00%
- C3.00%
- D7.00%Correct
Explanation
Interest per debenture is ₹100 and net proceeds are ₹1,000, so the pre-tax cost is 10%. After-tax cost = 10% x (1 - 0.30) = 7%. The 13% option wrongly adds the tax rate instead of using the tax shield.
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