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Hello Sir,
Should we always use actual cost of capital to discount rather than real cost of capital?
Thanks for clarifying.
It depends on what the question asks for !!!!
Usually we discount the nominal (actual) cash flows at the nominal (actual) cost of capital.
Only if the question says differently (or if it is a perpetuity) do we discount the real (without inflation) cash flows at the real (without inflation) cost of capital.
(With a perpetuity it would be impossible to get the actual cash flows, which is why with a perpetuity we would have to discount at the real cost of capital. However this is not common in the exam.)
I do explain all of this in my free lectures. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
When calculating the cost of debt for redeemable bonds, using the irr method I found that the cost of capital would differ slightly if u use different sets of DF for example
10 % and 3 % or 7% and 4%
This may give me a cost of debt of 6.3% and 6.6% respectively. I’m assuming it’s because of the running off during calculation. However if I was to round these off to nearest % I would get 6 and 7 %.
My question is whether this would be a problem in the exam. Thank you.
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