A company issues 20,000, 18% Debentures of 100 each. The debentures are redeemable after a period of 8 years. The cost of debentures using…

CA Intermediate · Financial Management and Strategic Management · PYQS · September 2025
A company issues 20,000, 18% Debentures of 100 each. The debentures are redeemable after a period of 8 years. The cost of debentures using approximation method is 14.58%. The corporate tax rate is 30%. You are required to calculate: (i) Issue price of the Debentures, if redeemable at par. (ii) Revised Cost of Debentures using approximation method, if redeemable at 10% Premium after 8 years.

Suggested Answer and Working Notes:

(i) Cost of Redeemable Debenture (K d ) = [I(1-t) + (RV-NP)/n] / [(RV+NP)/2] 0.1458 = [18(1-0.3) + (100-NP)/8] / [(100+NP)/2] 0.1458 = [12.6 + (100-NP)/8] / [(100+NP)/2] 0.1458 * (100+NP)/2 = 12.6 + (100-NP)/8 0.0729 * (100+NP) = 12.6 + 12.5 - NP/8 7.29 + 0.0729NP = 12.6 + 12.5 - 0.125NP 0.1979NP = 17.81 NP = 17.81 / 0.1979 = 90 Issue price of the Debentures = 90 (ii) Revised Cost of Redeemable Debenture (K d ) = [I(1-t) + (RV-NP)/n] / [(RV+NP)/2] RV = 100 + 10% of 100 = 110 K d = [18(1-0.3) + (110-90)/8] / [(110+90)/2] K d = [12.6 + 20/8] / [200/2] K d = [12.6 + 2.5] / 100 K d = 15.1 / 100 = 0.151 or 15.1%

Topics: Part-A: Financial Management

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