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CS Executive · Corporate Accounting and Financial Management · Cost of Capital

Meera Ltd raises ₹10,00,000 through 9% debentures issued at par, with floatation costs of 2% of the issue amount, redeemable at par after 10 years. Tax rate is 30%. Using the approximate formula Kd = [I(1−t) + (RV − NP)/n] / [(RV + NP)/2], what is the after-tax cost of debt?

Applying the formula, after-tax interest of ₹63,000 plus ₹2,000 yearly amortisation of issue cost gives ₹65,000, divided by average value ₹9,90,000, yielding roughly 6.6% after-tax cost of debt.

  1. A6.3%
  2. B6.7%Correct
  3. C9.0%
  4. D6.9%

Explanation

NP = 9,80,000; RV = 10,00,000; I = 90,000. Numerator = 90,000×0.7 + 20,000/10 = 63,000 + 2,000 = 65,000. Denominator = (10,00,000 + 9,80,000)/2 = 9,90,000. Kd = 65,000/9,90,000 = 6.57%, which is about 6.6%, so none match exactly; the key is flawed.

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