a company issues debentures of rs 100000 and realises rs 98000 after allowing 2% commision to broken . the debentures carry an intrest rate of 10%. the debentures are redeemable at the end of 10 th year.calculate cost of debentures before tax.
To calculate the cost of debentures before tax, we need to find the initial amount raised by the company by issuing the debentures.
Given information:
- Face value of the debentures: Rs 100,000
- Amount realized by the company: Rs 98,000 after allowing a 2% commission to the broker
- Interest rate: 10%
- Redemption period: 10 years
First, let's calculate the commission paid to the broker:
Commission = 2% of Face Value
Commission = (2/100) * Rs 100,000
Commission = Rs 2,000
Now, subtract the commission paid to the broker from the amount realized by the company:
Amount raised = Amount realized - Commission
Amount raised = Rs 98,000 - Rs 2,000
Amount raised = Rs 96,000
Next, we need to calculate the annual interest payment on the debentures. The annual interest payment can be calculated using the formula:
Annual interest payment = Face value * Interest rate
Annual interest payment = Rs 100,000 * 10%
Annual interest payment = Rs 10,000
Since the debentures are redeemable after 10 years, the total interest payment over the 10-year period is:
Total interest payment = Annual interest payment * Redemption period
Total interest payment = Rs 10,000 * 10
Total interest payment = Rs 100,000
Finally, the cost of the debentures before tax is the sum of the amount raised and the total interest payment over the redemption period:
Cost of debentures before tax = Amount raised + Total interest payment
Cost of debentures before tax = Rs 96,000 + Rs 100,000
Cost of debentures before tax = Rs 196,000
Therefore, the cost of the debentures before tax is Rs 196,000.