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Sir please for the calculation of irr convertible debt, why the length of time is 6 years? I used 8 like the question. And the rate, why not 7% and maybe 5%?. The convertible debt is 7%.
ThanksYou calculate the IRR based on the what the investor is likely to do.
They will be able to convert to shares in 6 years time or take cash in 8 years time – it is their choice and at present they will be expecting to convert to shares in 6 years time because that is better for them.I don’t know what you are meaning by ‘7% and maybe 5%’. When calculating the IRR then, as always, you make two ‘guesses’ and then approximate. The examiner used 10% and 5%, but any two guesses would do (even though the answer will be slightly different due to the fact that the relationship is not linear).
I really do suggest that you watch our free lectures on this.
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