Cost of Debt

Question 1

What do irredeemable loan notes?

Answer 1

Entitle the holder to receive interest over an indefinite period

Question 2

Can loan notes be bought on the stock market/

Answer 2

Yes

Question 3

What happens when company pays interest?

Answer 3

Reduces taxable profitswhich reduces tax paid on its profits

Question 4

Reducing taxable profits impact on the company?

Answer 4

Reduces the net cost of debt to the company

Question 5

What does IRR require?

Answer 5

Cash flows are laid out each year

Question 6

What happens for redeemable debt the cash flows?

Answer 6

Is the market value of the debt, post-tax interest and the cash flow on redemption

Question 7

Redeemable loans traded?

Answer 7

Yes and have a market price

Question 8

What does a preference shareholder receive

Answer 8

A fixed income based upon nominal value of shares held (not market value)

Question 9

How are dividends on preference shares paid?

Answer 9

Paid out of post-tax profit and therefore do not receive tax relief