Chapter 2 Flashcards

1
Q

What are the features of debt?

A

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

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2
Q

How do you calculate cost of debt for redeemable bonds?

A

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

then calculate IRR

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3
Q

What is the WACC procedure?

A

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

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4
Q

Whose perspective is yield to maturity from?

A

investors

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5
Q

How do you calculate YTM for irredeemable debt?

A

Annual interest/current mv of debt x 100

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6
Q

How do you calculate YTM for redeemable debt?

A

IRR of bond price

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7
Q

How do you calculate cost of debt of redeemable debt?

A

IRR of:
Market value
Net Interest
Redemption amount

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8
Q

How do you calculate cost of debt of bank borrowing?

A

annual interest rate (1 - tax rate)

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9
Q

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

A

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

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