(154)---COST OF CAPITAL - DEBT ISSUED AT DISCOUNT OR PREMIUM

Cost of Capital – Debt Issued at Discount or Premium

Calculate the cost of capital using equation given below,

Bo = (INT1 /(1+Kd)1) + (INT2 / (1+Kd)2)----------------------------(INTn / (1+Kd)n) + (Bn / (1+Kd)n

Where Bn is repayment of debt on maturity and other variables as define earlier post.

Calculate the cost of capital of debt whether debt is issued at discount or premium the following equation can be used,

Kd = (INT + 1/n (F-Bo)) / (1/2 (F+Bo))

It should be clear from the preceding discussion that the before tax cost of bond to the firm is affected by the issue price. The lower the issue price, the higher will be the before tax cost of debt. The highly successful companies may sell bond or debentures at a premium, this will pull down the before tax cost of debt.