Q. Evaluate Cost of Irredeemable Debt subsequent to tax?
Cost of Irredeemable Debt subsequent to tax: - When a company utilizes debt as a source of finance then it saves a considerable amount in payment of tax for the reason that the amount of interest paid on the debts is a deductible expense in computation of tax. Formula for computing cost of debt after tax is:
K_{da} = (-1/ NP) X 100 (1-t)
K_{da} = Cost of debt after tax
I = Annual Interest Charges
NP = Net Proceeds from the issue of Debt
t = Rate of Tax