Cost of Redeemable Debt Formula

Cost of Redeemable Debt Formula

Cost of redeemable debt formula has been given below. Cost of redeemable debt has been explained with an example.

Cost of Redeemable Debt Formula = L +(NPVL/NPVH-NPVL)x (H-L)

Where

R_L= Lower rate of Return

R_H= Higher Rate of Return

NPV_L= NPV with Lower rate of Return

NPV_H= NPV at higher rate of return

Cost of irredeemable debt process has been explained by example;

Cost of Redeemable Debt Formula Example

XYZ Quoted Rate	102
Coupon Rate	12%
Tax rate on companies	40%
Maturity	5 years

Solution

Particulars	Value	Dis. 5%	PV @ 5%	Dis. 10%	PV @ 10
Market Value	108	1	108	1	108
Interest	(7.2)	4.329	(31.172)	3.791	(27.29)
Redemption Value	(100)	.784	(78.40)	.621	(62.1)
			(1.57)		18.61

 Formula = L +(Nl/Nh-Nl)x (H-L)

 = 5% + (1.57/18.61)(7%)

 =.05+.323(.05)

 =5.59%

It is to be noted that interest rate is discounted by annuity factor, because it is a regular payment, while redemption value is discounted at straight discounting factor (at once), because it is onetime payment in five year.