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Cost of Perpetual Debt and Redeemable Debt

Cost of Perpetual Debt and Redeemable Debt:

It is the rate of return which the lenders expect. The debt carries a certain rate of interest.

Kdb = [I+1 / n(P-Np)n] / [1 / n(P+Np] / 2

Where,

I = Annual interest payable

P = Par value of debt

Np = Net proceeds of the debenture

n = Number of years to maturity

Kdb = Cost of debt before tax.

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Cost of debt after tax can be calculated with the help of the following formula:

Kda =Kdb x (1–t)

Where,

Kda = Cost of debt after tax

Kdb = Cost of debt before tax

t = Tax rate

Cost of Perpetual Debt and Redeemable Debt Cost of Perpetual Debt and Redeemable Debt Reviewed by Ikpokolo Francis on Thursday, May 04, 2017 Rating: 5

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