A company has issued 10% perpetual debt of Rs. 1,00,000 at 5% premium. If tax rate is 30%, then the cost of debt will be

The correct answer is C. 6.66%.

The cost of debt is the rate of return that a company must pay on its debt in order to attract investors. It is calculated by taking the annual interest rate on the debt and multiplying it by (1 – the tax rate). In this case, the annual interest rate is 10%, and the tax rate is 30%. Therefore, the cost of debt is 6.66%.

Here is a step-by-step explanation of how to calculate the cost of debt:

1. Calculate the annual interest rate on the debt. In this case, the annual interest rate is 10%.
2. Multiply the annual interest rate by (1 – the tax rate). In this case, the tax rate is 30%, so (1 – the tax rate) = 0.7.
3. The result is the cost of debt. In this case, the cost of debt is 6.66%.

Here is a brief explanation of each option:

• Option A: 10%. This is the annual interest rate on the debt. However, it does not take into account the tax rate. Therefore, it is not the correct answer.
• Option B: 15%. This is the annual interest rate on the debt plus the tax rate. However, it does not take into account the fact that the debt is perpetual. Therefore, it is not the correct answer.
• Option C: 6.66%. This is the correct answer. It is calculated by taking the annual interest rate on the debt and multiplying it by (1 – the tax rate).
• Option D: 8.21%. This is the annual interest rate on the debt plus the tax rate, divided by 2. However, it does not take into account the fact that the debt is perpetual. Therefore, it is not the correct answer.