Chapter 2 Flashcards
What are the features of debt?
Interest is tax deductible
Debt quoted in £100 nominal units
Debt redeemable at par value
How do you calculate cost of debt for redeemable bonds?
Cash Flow
YR 0 - Market value of bond
YR 1-N Annual interest payments
YR N Redemption Value
then calculate IRR
What is the WACC procedure?
Calculate weights of each capital based on market value
Estimate cost of each
Multiply weight by cost
Sum results
Whose perspective is yield to maturity from?
investors
How do you calculate YTM for irredeemable debt?
Annual interest/current mv of debt x 100
How do you calculate YTM for redeemable debt?
IRR of bond price
How do you calculate cost of debt of redeemable debt?
IRR of:
Market value
Net Interest
Redemption amount
How do you calculate cost of debt of bank borrowing?
annual interest rate (1 - tax rate)
How do you calculate cost of debt of iredeemable or undated debts?
Interest paid (1 - tax rate) / ex int market price of bond