Problem 3 A company is considering raising of funds of about Rs. 100...
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Accounting
Problem 3
A company is considering raising of funds of about Rs. 100 lakhs by one of two alternative
method, viz., 14% institutional term loan or 13% non-convertible debentures. The term loan
option would attract no major incidental cost. The debentures would have to be issued at a
discount of 2.5% and would involve cost of issue of Rs. 1,00,000.
Advise the company as to the better option based on the effective cost of capital in each case.
Assume a tax rate of 50%.
3
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