Cost of irredeemable Debt

Cost of irredeemable Debt

Irredeemable debt is never paid pack (theoretical concept). Cost of irredeemable debt is calculated by the following formula

Io ( 1-T)/Po

Where,

Io= Interest rate

T= Tax Rate

Po= Market value of debt (Ex interest Price)

 Example

Rate of interests = 9%

Value of Debt= 120

Tax Rate =30%

Solution

Io ( 1-T)/Po

= [ 9(1-30%)]/120

=6.3/120

=5.25% (cost of Debt)