Cost of Capital (3)

Question 1

What are irredemable loan notes?

Answer 1

A type of debt finance where the company will never repay the principal but will pay interest each year until infinity

Question 2

What are redeemable loan notes?

Answer 2

A loan note that can be redeemed by the issuer prior to its maturity date

Question 3

Why are cash flows not perpetuity in reedemable loan notes?

Answer 3

The principal will be repaid

Question 4

Calculation change to IRR if interest is paid every 6 months?

Answer 4

The calculation of the IRR of the loan notes must be based on cash flows at six-month intervals

Question 5

What do convertible loan notes allow?

Answer 5

Investor to choose between redemption at some future date or conversion into a predetermined number of ordinary shares

Question 6

What is needed to find post-tax cost of convertible debt?

Answer 6

Find the IRR of the after-tax cash flows

Question 7

As bank loans are not traded?

Answer 7

Their book value must be used as a proxy for market value.

Question 8

What should a profitable company be able to do for bank loans?

Answer 8

Claim a tax shield on bank loan interest