Cost of Irredeemable (Perpetual) Debentures

## Cost of Irredeemable Debentures

Irredeemable debentures (also called perpetual debentures) have no fixed maturity date — the company pays interest forever but never repays the principal. Because there is no repayment, the cost is simply the after-tax interest yield on the net proceeds or current market price.

### Formula

For new issue:

```

Kd = I(1 − t) / NP

```

For existing debentures (using market price):

```

Kd = I(1 − t) / MP

```

Where:

• `I` = Annual interest (coupon rate × face value)
• `t` = Corporate tax rate
• `NP` = Net proceeds = Issue price − Flotation costs
• `MP` = Current market price

### Why we adjust for tax

Interest on debentures is a deductible expense, so the government effectively subsidises part of the cost. A company paying 35% tax retains only 65 paise of every rupee earned, so paying ₹16 interest really costs only ₹10.40 after tax.

### Issue price adjustments

### Key insight

For existing debentures, use the current market price (not the original issue price) because the market price reflects the current opportunity cost to the investor.