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Chaptter 17

4.3 Irrredeemabble debt

I I(11 – t)
k d == ––– ‘k d(1 – T)’ = ––––––––
MV MMV

k d == debt holders’ requir red rate of return

I = aannual inteerest startinng in 1 yeaar’s time

MV = ex-int mmarket pricee of the loaan note

‘k d(11 – T)’ = coost of debt t to the commpany

T = rate of corrporation taax

Quuestionn 11

Cost of irredeeemable debt

Bishhop Co hass in issue 66% irredeemable debbt quoted aat $105 (exx-interest). The
corpporation taxx rate is 300%.

Calcculate the rreturn requuired by thee debt provviders and the cost oof debt to
Bishhop Co.

Kd == I/MV

Kd == ($100 × 66%)/$105 == 0.057 or 5.7%

Kd (1 – T) = I (1 –– T)/MV

Kd (1 – T) = ($6 ×× 0.7)/$1055 = 0.04 orr 4%

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