A company issues GHS 1,000,000 12% debentures of par value of GHS 100 each. The debentures are redeemable after the expiry period of 7 years. The company is in the 35% tax bracket. Required (i) Calculate the cost of debt after tax, if debentures are issued at: • Par • 10% Discount • 10% Premium (ii) Based on the relationship between coupon interest rate and cost of debt, explain why debenture may be issued at par, discount and premium.
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
A company issues GHS 1,000,000 12% debentures of par value of GHS 100 each. The debentures
are redeemable after the expiry period of 7 years. The company is in the 35% tax bracket.
Required
(i)
Calculate the cost of debt after tax, if debentures are issued at:
• Par
• 10% Discount
• 10% Premium
(ii) Based on the relationship between coupon interest rate and cost of debt, explain why debenture
may be issued at par, discount and premium.
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