Dear tutor please explain that why in WACC calculation we use market based cost of debt i.e IRR. If we have issued bonds to raise finance say for $100 each with a coupon rate of 10%. Now if after some time interest rates rises say reaches to 12%as a result of which the required return of debt holders would rise resulting in a fall in value of bond price. But why the company is bothered about their (bondholders) required return and using this IRR in WACC calculation for appraising investment projects after all whatever their required return is, the company only have to pay them 10% as a return on their investment.
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