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314 Corporate Finance BRILLIANT’S

SOLVED PRACTICAL QUESTIONS

COST OF DEBTS / S>oãQ²>g H$s bmJV

 Irredeemable Debentures / B[a©S>r‘o~b {S>~|Mg©

Illustration 4.1.4
Mumbai Machinery Ltd. borrowed ` 6,00,000 from its bank for 6 months at an annual inter-
est rate of 16%. The bank deducted 6 months interest in advance at the time of giving the loan. The
corporate tax rate is 30%. Compute the after tax annual cost of capital.
‘§w~B© ‘erZar {b{‘Q>oS> Zo 16% ã¶mO Xa dm{f©H$ na 6 ‘mh Ho$ {bE BgH$s ~¢H$ go ` 6,00,000 CYma {b¶o& ~¢H$
Zo F$U XoVo g‘¶ A{J«‘ 6 ‘mh H$m ã¶mO H$mQ> {b¶m& H$m°nm}aoQ> Q>¡³g aoQ> 60% h¡& Q>¡³g Ho$ níMmV² H¡${nQ>b H$s dm{f©H$
bmJV H$s JUZm H$s{OE&

Solution:
16 6
(a) Interest for 6 months = 6,00,000  = ` 48,000
100 12
Net Amount received = 6,00,000 – 48,000 = ` 5,52,000
Interest for the whole year = ` 96,000
Interest 96,000
K =  100   100 = 17.39%
i Net Amount 5,52,000
After tax cost of capital K = K (1 – t)
d i
= 17.39 (1 – 0.30) = 17.39 × 0.70 = 12.17%
Illustration 4.1.5
X Ltd. has issued 10% irredeemable debentures of ` 1,00,000. Par value of debentures is ` 100.
Find out the cost of capital, if debentures have been issued (i) at par, (ii) at discount of 10% and
(iii) at premium of 10%.
X {b{‘Q>oS>>Zo ` 1,00,000 Ho$ 10% B[a©S>r‘o~b {S>~|Mg© Omar {H$¶o& {S>~|Mg© H$s nma d¡ë¶y ` 100 h¡& H¡${nQ>b H$s
H$m°ñQ> kmV H$s{OE, ¶{X {S>~|Mg© H$mo Omar {H$¶m J¶m h¡… (i) EQ> nma (ii) 10% {S>ñH$mC§Q> na VWm (iii) 10% àr{‘¶‘ na

I
Solution: K   100
i
NP
10 100
Case (i): I = 10; NP = 100 K   10%
i
100
10 100
Case (ii): I = 10; NP = 100 – 10 = 90 K   11.1%
i
90
10 100
Case (iii): I = 10; NP = 100 + 10 = 110 K   9.09% .
i
110