The formula to calculate the Cost of Redeemable Debt (Kd) is:
\[ K_d = \frac{I + \frac{(RV - NP)}{n}}{\frac{(RV + NP)}{2}} \]
Where:
The cost of redeemable debt refers to the effective interest rate that a company pays on its debt, considering the annual interest payments, the redemption value of the debt, the net proceeds received from issuing the debt, and the number of years to maturity. This metric is crucial for companies to understand the true cost of borrowing and to make informed financial decisions. The cost of redeemable debt helps in evaluating the feasibility of financing projects through debt and comparing it with other sources of financing.
Let's assume the following values:
Using the formula to calculate the Cost of Redeemable Debt:
\[ K_d = \frac{50,000 + \frac{(1,000,000 - 950,000)}{10}}{\frac{(1,000,000 + 950,000)}{2}} = 0.0526 \]
The Cost of Redeemable Debt (Kd) is 0.0526 or 5.26%.
