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what is cost of debt

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 Uma asked almost 3 years ago

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 narahari answered over 2 years ago

Firstly let me tell you what is cost of capital :-cost of capital is the cost that a firm incurs in retaining the funds obtained for various sources .These sources are equity shares,preference shares,debt.retained earnings. Now what is cost of debt ? funds can be raised through debt in the form of debentures,or loan from financial institutions ,banks,private company ,lenders,public deposits etc ,thus the loan providers expect an interest on the amount loaned by them .This interest is the cost for the company which has taken loan ..in other words this interest is the cost of debt .Now how to calculate cost of debt

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 upwan singh answered almost 3 years ago

Firstly let me tell you what is cost of capital :-cost of capital is the cost that a firm incurs in retaining the funds obtained for various sources .These sources are equity shares,preference shares,debt.retained earnings. Now what is cost of debt ? funds can be raised through debt in the form of debentures,or loan from financial institutions ,banks,private company ,lenders,public deposits etc ,thus the loan providers expect an interest on the amount loaned by them .This interest is the cost for the company which has taken loan ..in other words this interest is the cost of debt .Now how to calculate cost of debt :- cost of debt is calculated on the basis of net proceeds.The interest payments made by the entity on its debt is after deducting expenditure for taxation purpose .The debt may be irredeemable or redeemable .firstly irredeemable debt:- irredeemable debt is one which is not paid during the life time of the company and can be calculated as follows:-cost of debt (kd)= interest(1-tax)/ np where np is net proceeds . now redeemable debt:- redeemable debt is one which is paid after the completion of pre decided period and can be calculated as:- kd=[interest(1-tax ) (Redeemable price-Net proceeds)/n ] / netproceeds redeemable price /2. where net proceeds can be caculated as :- selling price -discount on issue of debentures premium on issue of debentures-comiission /brokerage .

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 veeru answered almost 3 years ago

COST OF DEBT Debt is the cheapest form of long-term debt from the company’s point of view as: It’s the safest form of investment from the point of view of creditors because they are the first claimants on the company’s assets at the time of its liquidation. Likewise they are the first to be paid their interest. Another, more important reason for debt having the lowest cost is the tax-deductibility of interest payments.

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Data?1494421730 rohit awasthi answered almost 3 years ago

Dear Friend > Cost of Debt Cost of debt capital is associated with the amount of interest that is paid on currently outstanding debts. It is denoted by Kd. “ The firm has to pay as the contractual amount to the debenture holders.” http://image.slidesharecdn.com/costofcapital-110427090145-phpapp01/95/cost-of-capital-6-728.jpg?cb=1303895895 http://image.slidesharecdn.com/costofcapital-110427090145-phpapp01/95/cost-of-capital-7-728.jpg?cb=1303895895

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 lochan answered almost 3 years ago

**COST OF DEBT** Debt is the cheapest form of long-term debt from the company’s point of view as: It’s the safest form of investment from the point of view of creditors because they are the first claimants on the company’s assets at the time of its liquidation. Likewise they are the first to be paid their interest. Another, more important reason for debt having the lowest cost is the tax-deductibility of interest payments. i.e. Interest is allowed to be debited to Profit and Loss account due to which taxable income and consequently tax is also reduced. Thanks

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