Chapter 2

Question 1

What are the features of debt?

Answer 1

Interest is tax deductible
Debt quoted in £100 nominal units
Debt redeemable at par value

Question 2

How do you calculate cost of debt for redeemable bonds?

Answer 2

Cash Flow
YR 0 - Market value of bond
YR 1-N Annual interest payments
YR N Redemption Value

then calculate IRR

Question 3

What is the WACC procedure?

Answer 3

Calculate weights of each capital based on market value
Estimate cost of each
Multiply weight by cost
Sum results

Question 4

Whose perspective is yield to maturity from?

Answer 4

investors

Question 5

How do you calculate YTM for irredeemable debt?

Answer 5

Annual interest/current mv of debt x 100

Question 6

How do you calculate YTM for redeemable debt?

Answer 6

IRR of bond price

Question 7

How do you calculate cost of debt of redeemable debt?

Answer 7

IRR of:
Market value
Net Interest
Redemption amount

Question 8

How do you calculate cost of debt of bank borrowing?

Answer 8

annual interest rate (1 - tax rate)

Question 9

How do you calculate cost of debt of iredeemable or undated debts?

Answer 9

Interest paid (1 - tax rate) / ex int market price of bond