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Irredeemable Debentures

Sir, Why do we take average cost while computing Kd for irredeemable debentures. While for redeemable debentures we take only the Net Proceed as cost . By average cost I mean the average of net proceeds and redemption value. Can anyone explain the logic.


MAHITHA SENTHIL KUMAR

MAHITHA SENTHIL KUMAR

CA Inter

800

04-May-20 20:12

25

Answers (2)

We take average of RV & NP for redeemable not irredeemable. The cost of debt is merely the interest rate paid by the company on its debt. However, since interest expense is tax-deductible, the debt is calculated on an after-tax basis. Thus it is the return expected by debenture holders for the money they put in. In irredeemable debentures, we dont repay any amount to the debenture holders . But in redeemable debentures the amount we pay interest during the period and also redeemable value at the end of the term, thus the numerator has both the returns expected by debenture holders. Now the denominator should have what the debenture holder's money with the company , at the beginning the issue value and at the end redemption value thus the average


sudha reddy

sudha reddy

Moderator

05-May-20 08:28

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