In: Finance
Ten years ago, God’sway Ltd issued GH¢2.5 million of
6% discounted debenture at GH¢98 per
GH¢100 nominal. The debentures are redeemable in 6 years from now
at a GH¢2 premium over
nominal value. They are currently quoted at GH¢79 per debenture, ex
interest. The company
pays tax at the rate of 30%. Required: Estimate the after tax cost
of the debenture.
Kd = | (1-t)*{I+[(RV-NP)/n]} | *100 | |
[(RV+NP)/2] | |||
where, | |||
Kd = | Cost of Debt | ||
I = | Amount of Interest | ||
t = | Tax rate | ||
RV = | Redemption Value i.e. Face Value + Premium on Redemption | ||
NP = | Net Proceeds i.e. Face Value - Discount on Issue | ||
n = | Period of Debt | ||
Thus, we substitute given values in the above formula, as follows - | |||
Kd = | ? | ||
I = | 25000 debentures*$100 par value*6% interest p.a. = $ 150,000 | ||
t = | 30% | ||
RV = | 25000 debentures*($100 par value+$2 premium) = $ 25,50,000 | ||
NP = | 25000 debentures*($100 par value-$2 premium) = $ 24,50,000 | ||
n = | 6 years | ||
Kd = | (1-.30)*{150,000+[(25,50,000-24,50,000)/6]} | *100 | |
[(25,50,000+24,50,000)/2] | |||
Kd = | 4.667% |