Cost Of Capital Of Redeemable Debt

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The cost of capital of redeemable debt may be ascertained with the help of  equation.

              Bo   =      ∑       Ii (1 – t)/ (1+ kd)i  + COPi /(1+ kd)i  + COPn / (1+ kd) n

      where  I  =  Annual Interest Payment
                 Bo = Net Proceeds
                 COP i  =  Regular cash outflow on account of amortization
                 COP n =  Cash outflow on account of repayment  at maturity
                     k   =  After tax cost of capital of debt.

 In case, the debt is repayable only at the time of maturity and there is no annual amortization then the equation will not contain the second element. The equation is to solved for the value of k d, which will be after tax cost of capital for debt. This equation is to solved by trail and error procedure.
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