The cost of the perpetual debt is nothing but the cost of raising the debt financial resource, in which the time period of repayment of the principal is not known. This particular specific source has two different classifications viz cost of interest and cost of debt.
Cost of interest (Ki)= Interest Sale value
Cost of Debt (Kd)= Tax adjusted Interest Sale value
Problem on Cost of Debt
The next method of computing the cost of debt is only for the debt finance which knows the repayment period of the principal and the payment of the interest periodicals.
This process of computation could be divided into two categories
First one is the periodical repayment of the principal along with the periodical payment of interest periodicals.
CIo= COIt + COPn (1 kd)t
The second one is the lump sum repayment of the principally only at the end of the term of the debenture.
Problem on cost of debt
Trial Error approach:
The first step is to determine the cash flows involved in the process of the debentures issue
The present value of the future cashflows should be found out one after the another.
The determination of present value at 7% and 8%
The value of Cost of debt is 8%
The short cut method is as follows
I=Annual interest payment
d=Discount on debentures
pred=premium on redemption
pi=premium on issue of debentures
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