cost of debentures

to reach at 11% u hav to use interpolation technique as used in calculating IRR. first of all u need to understand cost of debenture = PV of cash outflows (discounted at the required rate of return i.e. 11% here which we will proceed to find) 1. take first discounting rate arbitrary as near to as kd supoose taken 12%.* 2. now find PV of cash flows at 12% as under PV of CF = Rs. 12* PVAF @ 12% for 3 years i.e. 2.40 + Rs. 100* PVF @ 12% at the end of 3rd year i.e. 0.71 which comes to 12 x 2.40 + 100 x 0.71 = Rs. 99.80* 3. now PV at 12% comes lower than required i.e. Rs. 102.50 therefore we need to find PV at lower discount rate so that PV comes equal to or more than Rs. 102.50. 4. now take 10% *discount rate and calculate PV @ 10% as under Rs. 12 x 2.49 (being PVAF @ 10% for years) + Rs. 100 x 0.75 which comes to Rs. 104.88* which is more than Rs. 102.50 5. now u can see that discount rate lies between 12% and 10% 6. now find the rate using interpolation formula as under Lower rate + (lower rate PV - required PV) x diff of rates taken / (lower rate PV - higher rate PV) i.e. 10% + (104.88 - 102.50) x 12-10 / (104.88 - 99.80) which comes to 10.94% due to rounding off of PVF. after sm practice u will also be able to find it on Calculator hope to get positive reply from you Best of luck

Hi,

Great

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