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5 Cards in this Set
- Front
- Back
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What is the cost of debt |
Investors expect to achieve a return similar to the rate of return offered on other instruments with the same risk currently. They are not interested in achieving a rate of return when the debt was first issued. |
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How to calculate rate of return on a zero-coupon debt |
r = (end cash/Start cash) ^(1/n) - 1 |
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Calculating rate of return on irredeemable debt |
Kd = I / Po I = Coupon Po = current price |
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Calculating rate of return on redeemable debt |
Have to calculate using interpolation: IRR estimate = a% + ((A/(A-B)) x (b% - a%)) Where a% achieves negative NPV and b% achieves posting A= NPV of a%, B = NPV of b% |
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Calculating total present value of debt tax benefit |
Capitalise the annual saving at the pre-tax cost of debt as a fixed perpetuity Annual saving/Kd |
