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Forums › ACCA Forums › ACCA FM Financial Management Forums › Cost of redeemable/irredeemable debt
Hi,
Can anyone explain why the cost of irredeemable debt (to a company) is the same as a redeemable debt which is redeemable at market value?
I know that, to find the cost of a redeemable debt which redeems at par (or at a premium to par value), i need to find the IRR at which the NPV is 0.
I also know that the cost of a redeemable debt which redeems at market value has a cost of I(1-T)/MV. I just don’t understand why.
Also, it just occurred to me that SMEs can use crowdsourcing (like using kickstarter.com) to finance their projects. but what category does it fall into? crowdsourcing is neither debt nor equity.
Thanks for your answers
all debt (redeemable or not) has interest payments which are tax deductible. So thats where the (1-T) or (1-tax) comes from.
It does not matter if it redeems at par or over par or under par, all interest is tax deductible and therefore you use (1-T).
Hope this helps