A company is considering raising Rs 100 lakh by one of the two alternative methods, viz. 14 percent institutional term loan and 13 percent non-convertible debentures. The term loan option would attract no major incidental cost. The debentures would have to be issued at a discount of 2.5 percent and would involve Rs 1 lakh as the cost of the issue. Advise the company as to the better option based on the effective cost of capital in each case. Assume a tax rate of 35 per cent.

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