Yunex Ltd has borrowed from the market by issues of debentures with the coupon rate of 10.5%. It is a profitable enterprise paying 36% tax.

1. What is the cost of debt if it sells at 5% premium (c) at 5% discount to the face value?
2. If instead of debt , the firm has issued a preference shares with the promised dividend of 10.5%, what would be the cost of preference shares when it sells (a)at par (b) at 5% premium (c) at 5% discount to the face value?
3. Why do you think that there is a difference in the cost of debt and preference capital despite identical and cash flows?

Answer rating: 100% (QA)

a Cost of debt when sold at a 5 premium The cost of debt can be calculated using the yield to maturity YTM formula Since the debentures are sold at a ... View the full answer