Question

A company has issued Rs. 20 million worth of non-convertible debentures, each at a face value of Rs. 100 at the rate of 12%. Each debenture is redeemable at a premium of 5% after 10 years. If the net amount realized is Rs. 95 and tax rate is 40% the cost per debenture will be
1. 5.8%
2. 6.6%
3. 7.4%
4. 8.2%

Answer 1

Correct Answer - Option 4 : 8.2%

Concept:

cost per debenture = \(\left( {\frac{{interest\left( {1 + t} \right) + \frac{{RV - NP}}{N}}}{{\frac{{PV + NP}}{2}}}} \right)\)

where RV = Reedemable value, NP = Net proceeds from issue

Calculation:

Given:

i = 12 % = 0.12, t = 40 % = 0.4, NP = 95

∴RV = 100 (1 + 0.005) = 105

Thus, substituting

cost per debenture = \(\left( {\frac{{12 \times \left( {1 - 0.4} \right) + \frac{{105 - 95}}{{10}}}}{{\left( {\frac{{105 + 95}}{2}} \right)}}} \right) \times 100\)

∴ cost per debenture\( = \left( {\frac{{7.5 + 1}}{{\frac{{200}}{2}}}} \right) = \left( {\frac{{8.2}}{{100}}} \right) \times 100 \)

∴ cost per debenture = 8.2 %