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The cost of capital

Estimating the cost of debt

4.1 Debt terminology and key points

 The terms loan notes, bonds, loan stock and marketable debt are used
interchangeably. Gilts are debts issued by the government.

 Debt is always quoted in $100 nominal blocks.

 interest paid on the debt is stated as a percentage of nominal value, called the
coupon rate.

 Ex-interest (after interest payment) and cum-interest (before interest payment).

4.2 The impact of tax relief

 Company receives tax relief on interest payments.

 Investor return (yield) k d > ‘k d(1 – T)’ cost of debt

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