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5 Cards in this Set

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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.

How to calculate rate of return on a zero-coupon debt

r = (end cash/Start cash) ^(1/n) - 1

Calculating rate of return on irredeemable debt

Kd = I / Po

I = Coupon

Po = current price

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%

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