Financial ManagementMCQQuestion 13436 of 300

A company issues 12% irredeemable debentures of face value ₹100 each at par. The corporate tax rate is 30%. What is the after-tax cost of debt ( $\displaystyle K_d$ )?

Select Your Answer (Keyboard: A, B, C, D)

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Correct Answer

✅ Option A — 8.40%

All Options:

A8.40% ✓
B10.00%
C11.40%
D7.20%

Detailed Solution & Explanation

Correct Answer: Option **A** (8.40%) **Financial Management Derivation (Cost of Capital - Cost of Debt (Kd)):**

K_d = I(1 - t) = 12\%

Hence, Option A is the correct answer.

Key Concepts to Understand

Debentures

Long-term debt instruments issued by a company to the public for raising loan capital, carrying a fixed rate of interest (coupon rate) payable regardless of profit. Debenture holders are creditors, not owners, of the company.

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A company issues 12% irredeemable debentures of face value ₹100 each at par. The corporate tax rate is 30%. What is the after-tax cost of debt (Kd\displaystyle K_dKd​)?