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Cost of Redeemable Debentures and Preference Shares

Redeemable fixed return securities have an exact maturity period. The cost of those securities is called redemption yield (RY) or yield to maturity (YTM). For a redeemable debenture K_d(cost of debt) = YTM = RY, can be determined using approximation technique follows as:

K_d /VTM/RY = (Int (1-T) + (M-V_d) 1/n) / (M+V_d)^1/2

Whereas: Int. = Interest charges p.a.

T = Corporate tax rate

M = Par or maturity value of a debenture

V_d = Current market value of a debenture

n = Number of years to maturity

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9520075

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