CA Inter P6 · Chapter 4 · Question 1 of 10
Pragati Ltd issues 12% irredeemable debentures of ₹ 100 each at ₹ 95 (net of issue costs). The corporate tax rate is 30%. The after-tax cost of these debentures is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 8.84%
Explanation
For irredeemable debt, Kd = I(1 - t) / NP = 12 x (1 - 0.30) / 95 = 8.40 / 95 = 8.84%. Using face value instead of net proceeds gives 8.40%. Ignoring tax gives 12.63%. The relevant base is the net amount actually raised, ₹ 95.
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