Final answer:
To calculate the cost of debt for X Limited, various factors such as the interest rate, the premium, flotation costs, and the tax savings from interest must be considered. The after-tax cost of debt can be found using a specific formula that considers all the relevant values adjusted for the currency and the number of debentures issued.
Step-by-step explanation:
The student asked how to compute the cost of debt capital for X Limited, which issued 50,000, 8% debentures of Rs. 10 each at a premium of 10% and had the cost of flotation at 2% with a tax rate of 60%. To compute the after-tax cost of debt, we need to account for the interest, premium, flotation costs, and tax savings due to interest. We use the formula:
Cost of Debt = (Interest(1-Tax rate) + (Flotation Costs + Premium) / Number of Years) / Net Proceeds x 100
Where Interest is the annual interest payment, the Tax rate is the applicable tax rate, Flotation Costs represent the total cost of issuing the debentures, Premium is the additional cost over the face value at which the debentures are issued, and Net Proceeds are the total amount received by the company after accounting for flotation costs and premium.
In the example given, these values need to be adjusted to reflect the currency (Rupees), the specific percentages, and a number of debentures mentioned in the question.