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Hello
Im facing some difficulties in understanding the calculation used to find the Post -tax cost of a redeemable debtIn the Kaplan Txt (chapter 17) , test your understanding ,14, the question requires the calculation of the cost of debt to the company, so post tax cost of debt.
In the answer given, i dont understand, the Discounted factor provided in the value of 5% and 15%. Becouse none of them are stated in the question .
So why are these DF used in order to calculate the PV of cash flows.
Ps: The same situation is similar in test your understanding nr 13Best Regards
AnaTo calculate the cost of debt you calculate the IRR of the after-tax flows.
As is usual with IRR calculations, you can use any two guesses to estimate it. Different guesses give slightly different answers because the relationship is not linear, but all answers get full marks provided obviously it is approached in the right way.
If you want to see a full example worked out then watch my lecture on here (cost of debt). (It is free like all the lectures 🙂 )
Thank you sir for your answer
So , if i understood correctly, the DF , are just a guess?!
So, isn’t there a rule to use each of them?!Beause i know how to calculate cost of debt, and therefore the IRR,
But , I just didnt understand where did the examiner found the 2 DF, used in the exampleBut , nevertheless, as you suggest , i will watxh your lecture, in order to be clear
Best Regards
AnaWhen i say isnt there a rule tu use each of them , I mean that till now i have learned by the text that we can use as a DF, the required rate of return from the investitor for example, but in both examples 13,14, its not mention this information, thats why i get confused where did the examiner found the DF used
There is no rule – you can use any two guesses.
With regard to your second post, it is the required return from the investor that determines the market value of the debt. That is a separate thing and there is certainly no need to use that as one of your guesses even if you are told it.
Yes
you are rightThanks a lot
it was very helpful comunicating with youHave a nice day
AnaA co. issue 9% bonds of a nominal value of $100 and the current market value is $106.
Required:
Calculate the cost of the bonds if the bonds are redeemable at the nominal value in 7 years timePlease do not simply set test questions and expect an answer.
You must have an answer in the same book in which you found the question and so you should ask about whatever it is in the answer that you are not clear about – then I will help you.
You have obviously not watched my free lectures, because this is a terribly simple question and I explain in detail in the lectures how to calculate the cost of debt. There is no point in attempting questions if you have not studied the topic first!
If you are not watching the lectures then you cannot really expect me to help you.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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