Forums › ACCA Forums › ACCA FM Financial Management Forums › Please help on Dec12 Q3 (a)
- This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
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- September 22, 2014 at 5:05 pm #195939
Hi,
Can anybody explain to me how is Kd calculated in Q3 (a) (Dec12 exam)?I don’t get why 2 IRRs are calculated? One at DF 7% and another at 6%.
I am also confused with this too,
“After-tax Kd = 6 + ((7 – 6) x 1·93)/(1·93 + 2·54)) = 6 + 0·43 = 6·43%”https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9_2012_dec_a.pdf (bottom of page 14)
September 22, 2014 at 5:41 pm #195950Have you watched the free lectures on how to calculate the cost of debt when it is redeemable? If not then you really should!
The examiner has not calculated two IRR’s at all. He has calculated the NPV’s at two rates of interest, and then approximated between them in the standard way to determine at what rate of interest the NPV is zero.
To get the cost of debt we need the IRR. The definition of the IRR is that it is that rate of interest for which the NPV is zero.
As you will know from the lecture, to find the IRR we choose two rates of interest and then approximate between the two on the assumption that it is linear. Any two rates of interest will do – he has chosen 6% and 7%, but any two ‘guesses’ will do.
September 22, 2014 at 5:57 pm #195951Oh yes. That is true. I did my F9 tuition a year ago (now I am only practicing) so I completely forgot that this is the way you calculate IRR. Silly me.
Thank you, John.September 23, 2014 at 6:46 am #195993You are welcome 🙂
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