‘HappyFeet’ Footwear has 12 million shares of common stock selling for INR 60/share. They
have 2 million shares of preferred stock selling for INR 85/share and INR100 million in bonds trading
at par @7% coupon p.a.. They are in the 40% tax bracket.
Find out it’s COD?

To calculate the Cost of Debt (COD) for ‘HappyFeet’ Footwear, we need to focus on the company's bonds, as debt refers to the interest-bearing liabilities like bonds, loans, or debentures.

### Step 1: Understanding the Key Details

- **Bonds Outstanding:** INR 100 million
- **Coupon Rate:** 7% per annum
- **Tax Rate:** 40%

### Step 2: Formula for Cost of Debt (COD)

\[
COD = Coupon \ Rate \times (1 - Tax \ Rate)
\]

This formula adjusts the cost of debt by taking into account the tax shield, which is the savings on taxes due to interest payments.

### Step 3: Calculation

- **Coupon Rate:** 7% of INR 100 million = INR 7 million
- **Tax Rate:** 40%

So, the **after-tax cost of debt** is:

\[
COD = 7\% \times (1 - 0.40) = 7\% \times 0.60 = 4.2\%
\]

Thus, the **Cost of Debt (COD)** is **4.2%**.

Would you like more details on how to apply this in other contexts or breakdowns on similar financial metrics? Here are a few related questions:

1. How does the cost of preferred stock differ from the cost of debt?
2. What factors influence a company's capital structure decisions?
3. How does the tax shield impact overall cost calculations in capital budgeting?
4. How do you calculate the Weighted Average Cost of Capital (WACC)?
5. What is the significance of bonds trading at par?

**Tip:** Always consider the tax shield effect when calculating the cost of debt, as it can significantly reduce the company's financing costs.

‘HappyFeet’ Footwear has 12 million shares of common stock selling for INR 60/share. They have 2 million shares of preferred stock selling for INR 85/share and INR 100 million in bonds trading at par @7% coupon p.a.. They are in the 40% tax bracket. Find out its COD?

Learn how to calculate the Cost of Debt (COD) for HappyFeet Footwear. This example uses bonds with a 7% coupon rate, a tax rate of 40%, and explains how to apply the tax shield in finance calculations. Ideal for finance students and business professionals.

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