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BRILLIANT’S Cost of Capital 315

Illustration 4.1.6
Khanna Ltd. has issued 30,000 irredeemable 14% debentures of ` 150 each. The cost of flota-
tion of debenture is 5% of the total issued amount. The company’s taxation rate is 40%. Calculate
the cost of debt.
IÝZm {b{‘Q>oS> Zo ` 150 à˶oH$ Ho$ 30,000 B[a©S>r‘o~b 14% {S>~|Mg© Omar {H$¶o h¢& {S>~|Ma H$s âbmoQ>oeZ H$m°ñQ>
Hw$b Omar am{e H$m 15% h¡& H§$nZr H$s Q>¡³goeZ aoQ> 40% h¡& S>oãQ> H$s bmJV H$s JUZm H$s{OE&
Solution:

(i) Calculation of Interest: 30,000 × ` 150 = ` 45,00,000 face value
45,00,000 14
 ` 6,30,000
100
(ii) Calculation of net amount realized by issue of debenture `
Face value 45,00,000
Less: Flotation cost 5% 2,25,000
42,75,000
(iii) Calculation of K d

I (1 t) 6,30,000 (1 0.40) 3,78,000

K = NP  100  42,75,000  100 = 42,75,000  100 8.84%
d
 Redeemable Debentures / arS>r‘o~b {S>~|Mg©

Illustration 4.1.7
B Ltd. wants to issue ` 10,00,000 or ` 100, 8% Debentures at a discount of 5%. The debentures
are repayable at par after 10 years. The company will pay ` 4 per debenture as issue expense to
the merchant banker. Assume corporate tax at 30%. Calculate the cost of debenture issue.
B {b{‘Q>oS> 5% Ho$ {S>ñH$mC§Q> na ` 10,00,000 ¶m ` 100, 8% {S>~|Ma Omar H$aZm MmhVr h¡& {S>~|Mg© 10 df©
Ho$ níMmV² EQ> nma [anoE~b h¢& H§$nZr ‘M]Q> ~¢H$a H$mo Bí¶y E³gn|g Ho$ ê$n ‘| ` 4>à{V {S>~|Ma H$m ^wJVmZ H$aoJr& H$m°nm}aoQ>
Q>¡³g 30% ‘mZm J¶m h¡& {S>~|Ma Bí¶y H$s bmJV H$s JUZm H$s{OE&

Solution:
Calculation of net price of debenture
Net price = Face value – Discount – Flotation cost
= 100 – 5 – 4
= 91

 RV NP   100 91 
 I 1 t      8 1 0.30    
 N   10  5.60 0.90
K =  100 =  100 =  100 6.81%


d  RV NP   100 91 95.50
   
 2   2 