Cost of Redeemable Debt

Cost of Redeemable Debt Formula

Cost of redeemable debt is calculated with the help of IRR formula (Internal Rate of return). The formula of IRR has given below

Formula = L +(NPV_L/NPV_H-NPV_L)x (H-L)

R_L= Lower rate of Return

R_H= Higher Rate of Return

NPV_L = NPV with Lower rate of Return

NPV_H= NPV at higher rate of return

Cost of irredeemable debt process has been explained by example;

ABC & Co Quoted	102
Coupon Rate	10%
Tax rate on companies	30%
Maturity	5 years

       Solution

Particulars	Value	Dis. 5%	PV @ 5%	Dis. 10%	PV @ 10
Market Value	102	1	102	1	102
Interest	(7)	4.329	(30.30)	3.791	(26.53)
Redemption Value	(100)	.784	(78.40)	.621	(62.1)
			(6.7)		13.37

      Formula = L +(Nl/Nh-Nl)x (H-L)

      = 5% + (6.7/20.07)(5%)

      =.05+.323(.05)

      =6.65%