A company has issued 10% perpetual debt of Rs. 1,00,000 at 5% premium. If tax rate is 30%, then the cost of debt will be

Solution (By Examveda Team)

What is a perpetual debt?
A perpetual debt is a loan that never needs to be repaid. The company keeps paying interest forever.

Premium on debt:
The company issued the debt at a 5% premium. This means the company actually received Rs. 1,00,000 + (5% of Rs. 1,00,000) = Rs. 1,05,000.

Tax effect:
The interest the company pays on its debt is tax-deductible. This means the company can reduce its tax bill by the amount of interest it pays. The tax rate is 30%.

Calculating the cost of debt:
The cost of debt is the effective interest rate after considering the tax savings. It's calculated as follows:
1. Interest payment: 10% of Rs. 1,00,000 = Rs. 10,000
2. Tax saving: 30% of Rs. 10,000 = Rs. 3,000
3. Net interest payment: Rs. 10,000 - Rs. 3,000 = Rs. 7,000
4. Cost of debt: (Net interest payment / Amount received) * 100
= (Rs. 7,000 / Rs. 1,05,000) * 100 = 6.66%

Therefore, the correct answer is C: 6.66%