IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects
Sundaram Ltd has issued irredeemable debentures with a coupon of 9% on Rs 100 nominal value. They trade at Rs 75 ex-interest. The corporate tax rate is 30%. What is the post-tax cost of debt?
The post-tax cost of debt is 8.4%. For irredeemable debt the pre-tax cost is interest of Rs 9 divided by market price Rs 75, which is 12%, and tax relief at 30% reduces this to 8.4%.
- A6.3%
- B8.4%Correct
- C9.0%
- D12.0%
- 16.0%
Explanation
Annual interest is Rs 9. Pre-tax cost = 9/75 = 12%. Post-tax cost = 12% x (1 - 0.30) = 8.4%. The 6.3% option taxes the coupon yield on nominal value (9% x 0.7), and 12% ignores tax relief.
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