IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Mehra Industries issues ₹100 crore of 10% irredeemable debentures at par. Corporate tax rate is 25%, and interest is tax-deductible. Ignoring issue costs, what is the post-tax cost of this debt to the company?
For irredeemable debt issued at par, the pre-tax cost equals the coupon, 10%. Interest is tax-deductible, so the post-tax cost is 10% multiplied by one minus 25%, giving 7.5%.
- A7.5%Correct
- B10.0%
- C12.5%
- D2.5%
- 15.0%
Explanation
Irredeemable at par: pre-tax cost = 10%. Post-tax = 10% × (1 − 0.25) = 7.5%. Option 12.5% wrongly divides by (1−t), and 2.5% is just the tax saving.
Did you get it right without looking?
One question tells you little. A timed set on Financial instruments issued or used by companies shows your real accuracy, how long you take and where you lose marks.
More Financial instruments issued or used by companies questions
- A company needs to finance seasonal working capital, with the need arising for a few months each year and disappearing afterwards. Which for…
- A company issues redeemable preference shares carrying a fixed dividend, with no voting rights, redeemable after ten years. Which treatment …
- Which statement best describes the position of ordinary shareholders of a company on a winding up?
- Which statement about warrants issued by a company on its own shares is correct?
- An Indian exporter will receive USD 500,000 in three months and wants to fix the rupee amount it will receive today, without paying an upfro…
- Which feature distinguishes exchange-traded futures from over-the-counter forward contracts used by companies?