Cost of capital and Investmen Appraisal

Hi svitlanazhela,

(1) Yes, ALWAYS assume that a unit of Loan Stock is valued or issued in units of $100 ONLY.

Another name for a unit of loan stock is a bond or a debenture. Thus, each of these are assumed to be issued at $100 - their PAR or NOMINAL value.

Therefore, the actual MARKET VALUE of a bond/debenture/Loan Note will trade on the stock market either above or below it's par value at a point in time.

(2) In Investment Appraisal Decision making, like other parts of the syllabus, there are many assumptions that you should be aware of.

One hugely important assumption is that management should proceed to make decisions in the best interests of the shareholders, and that the best way to achieve this is through the MAXIMIZATION of SHAREHOLDER WEALTH.

Of the four main Investment Appraisal techniques available (NPV, IRR, PB and ARR) it is assumed that NPV is the THEORETICALLY superior decision making technique.

On this basis, in the exam you must always choose the project that yield the highest NPV ... even when this decision may conflict with the findings of the other techniques.

This is what is meant by WORTHWHILE

Regards, Kevin