11.5 The cost of debt

Question 1

What does the “cost of debts” refer to?

Answer 1

The interest rate a company pays on its debt.

Question 2

Why is the cost of debt usually expressed as n after-tax rate?

Answer 2

Because tax deductions are available on interest.

Question 3

What are trredeemable debts?

Answer 3

Debts which are never paid (aka perpetual debts)

Question 4

What is the equation for calculation of debt after tax?

Answer 4

K = [I (1 - T)] / S

K = coat of debt
I = annual interest
t = corporate tax rate
S = market price of debt

Question 5

What are redeemable debts?

Answer 5

Debts usually repaid at their nominal value (at par), but may be issued as repayable at a premium of the nominal value.