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Chapter 20

Question 11

Cost of irredeemable debt

Bishop Co has in issue 6% irredeemable debt quoted at $105 (ex-interest). The
corporation tax rate is 30%.

Calculate the return required by the debt providers and the cost of debt to
Bishop Co.

Kd = I/MV

Kd = ($100 × 6%)/$105 = 0.057 or 5.7%

Kd (1 – T) = I (1 – T)/MV

Kd (1 – T) = ($6 × 0.7)/$105 = 0.04 or 4%

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