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Hi John
When using internal rate of return method to find the cost of redeemable debt why do we treat the market value as outflow and post tax interest payment and redemption amount as inflow in NPV calculation.
I explain this in my free lectures!
By all means treat the market value as an inflow and the interest payments as outflows – you will get exactly the same answer (because minus 0 is still 0 🙂 ).
We usually list the flows the other way round because that is how we are used to calculating IRR’s for projects.
i have one more question
assume…
“redeemable debt with nominal value 100 and ex div market value is 103”for IRR calculation in BPP sometimes it uses nominal value as outflow and sometimes market value as outflow..though requirements are same “calculate market value WACC. please clarify…”
like in tine co it uses market value and AQR it uses nominal value 100
question 214 and 217 as per latest revision kit…
I am away from home until tomorrow and do not have the Revision Kit with me. Ask again tomorrow and I will check the questions.
However, have you watched my free lectures, because how to calculate the cost of debt (which is what I assume you are referring to) is explained in detail, with examples, in my free lectures.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
(And you will never see debt quoted as ex div – that would be nonsense. It would be quoted ex int 🙂 )
@misbahkiran said:
i have one more questionassume…
“redeemable debt with nominal value 100 and ex INT market value is 103”for IRR calculation in BPP sometimes it uses nominal value as outflow and sometimes market value as outflow..though requirements are same “calculate market value WACC. please clarify…”
like in tine co it uses market value and AQR it uses nominal value 100
question 214 and 217 as per latest revision kit…
SORRY FOR POSTING QUESTION TWICE AS ONCE I POSTED I TRIED TO DELET BUT UNABLE TO DO THAT.
MOREOVER YES IT IS EX INTEREST SORRY FOR TYPO MISTAKE. AND THANKS FOR POINTING SILLY MISTAKE 🙂
COST OF DEBT CALCULATION I KNOW VERY WELL.
I AM ASKING ABOUT THE FIGURE WE TAKE AT TIME ZERO.
LIKE
0 . AT TIME ZERO WE TAKE MARKET VALUE OR NOMINAL VALUE
1-5
5Please do not type in capital letters.
I don’t know why you have asked the same question again. If you have watched my free lectures you will know that we use the market value (and you will know why).
You said that the BPP Revision Kit sometimes uses nominal value and sometimes uses market value. I do not believe that this can be the case, which is why I asked you which question you were referring to.
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