Cost of irredeemable Debt

Cost of irredeemable Debt

Cost of irredeemable debt formula has been given below. Cost of irredeemable debt formula has been explained with an easy example;

Cost of irredeemable Debt Formula = Io ( 1-T)/Po

Where,

Io= Interest rate

T= Tax Rate

Po= Market value of debt (Ex interest Price)

 Cost of irredeemable Debt Formula Example

Interest Rate = 12%

Debt Value= 150

Prevailing Tax Rate =40%

Solution

Io ( 1-T)/Po

= [ 12(1-40%)]/150

=7.2/150

=4.8% (cost of Debt)