Cost of redeemable debentures and preference shares, Finance Basics

Cost of Redeemable Debentures and Preference Shares

Redeemable fixed return securities have an exact maturity period.  The cost of those securities is called redemption yield (RY) or yield to maturity (YTM).  For a redeemable debenture Kd (cost of debt) = YTM = RY, can be determined using approximation technique follows as:

Kd /VTM/RY = (Int (1-T) + (M-Vd) 1/n) / (M+Vd)1/2

Whereas: Int.  = Interest charges p.a.

               T  = Corporate tax rate

               M   = Par or maturity value of a debenture

                Vd   = Current market value of a debenture

                n  = Number of years to maturity

Posted Date: 1/30/2013 4:28:31 AM | Location : United States







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