So since we’re considering both the rate and the premium with IRR in redeemable, am I correct to assume that the Cost of Irredeemable debts is in fact effective rate of interest?

Yes – it is the effective rate of interest the company is paying. (The effective interest being received by the investor is the IRR of the pre-tax flows)

It is a scientific calculator that you need for the exam, not a financial calculator.

Two things – one is that whatever calculator you use it must display only numbers and not letters. The other is that you still need to show workings because it is the workings that get the marks and not the final answer.

Dear sir, In case of making loss in fiscal year, is there still tax relief for the interest paid or a recalculation of interest rate for business review? Please kindly enlighten me this. Thank you very much.

It would only be relevant if the business as a whole made a loss (not just the project in question). However for the exam we assume that we always get the tax relief on the interest.

Hello Sir, In redeemable debt part b, as suggested if take +85 and other cashflows negative the NPV turns out to be Positive. in this case will the company issue debentures? whereas if we take -85 the NPV is -ve. Will the decision change?

Decision about whether the Gplc shall issue debentures or not. I have this understanding that if IRR is greater than Cost of capital then the company shall issue the debentures and if the case is vice versa then the company shall refrain from doing so.

Due to this understanding i had a doubt that if we get different IRR(+ve/-ve) with different approaches which shall be considered?

please correct me if i have understood it incorrectly.

But what you have written is not the case. If the company needs to raise money then they have the choice of issuing debentures or using equity finance. We do not compare with the cost of capital (the cost of capital will change anyway depending on how finance is raised).

As far as the IRR is concerned I repeat what I said before – the IRR will be the same regardless of the approach taken!

It may help you to watch my free Paper FM (was F9) lectures on this, because this is revision of Paper FM.

With redeemable debt, why cant you claim tax relief on any premium you pay at the end of the term? I.e. take out a loan with a nominal value of $100 and 10% premium, at the end of the term you pay $110. Why cant you claim tax relief on thr extra $10 which is effectively interest paid on maturity?

You are quite correct and I have made a silly mistake in the lecture – I must re-record it. I should have used 16.28 instead of 18.28 and so the answer is slightly different (and the printed answer in the lecture notes does have the correct answer). Sorry about that.

(Although (and I am not using this as an excuse) I would still have almost certainly got full marks in the exam despite the mistake because the approach was correct and the difference it makes is minimal (and the answer is of course only ever an approximation anyway 馃檪 ))

With redeemable debt, why cant you claim tax relief on any premium you pay at the end of the term? I.e. take out a loan with a nominal value of $100 and 10% premium, at the end of the term you pay $110. Why cant you claim tax relief on thr extra $10 which is effectively interest paid on maturity?

mbopentuition says

is 16.86 not 18.86

John Moffat says

What is ???

mehrfatima says

Hi,

So since we’re considering both the rate and the premium with IRR in redeemable, am I correct to assume that the Cost of Irredeemable debts is in fact effective rate of interest?

mehrfatima says

Sorry, cost of redeemable debts.

Great lecture. Very clear!

John Moffat says

Yes – it is the effective rate of interest the company is paying. (The effective interest being received by the investor is the IRR of the pre-tax flows)

mehrfatima says

Okay. Thank you. ^^

John Moffat says

You are welcome 馃檪

jocelynjm says

Hi John,

Thanks for the excellent lecture.

Just wondering are we allowed to take a financial calculator into the exam? Thanks heaps!

John Moffat says

It is a scientific calculator that you need for the exam, not a financial calculator.

Two things – one is that whatever calculator you use it must display only numbers and not letters. The other is that you still need to show workings because it is the workings that get the marks and not the final answer.

Thanks for the comment 馃檪

jocelynjm says

Thank you 馃檪

John Moffat says

You are welcome 馃檪

gnoii says

Dear sir,

In case of making loss in fiscal year, is there still tax relief for the interest paid or a recalculation of interest rate for business review?

Please kindly enlighten me this.

Thank you very much.

John Moffat says

It would only be relevant if the business as a whole made a loss (not just the project in question). However for the exam we assume that we always get the tax relief on the interest.

ashrf16 says

since the premium of 10% can be accounted as an interest, wouldn’t the premium be tax allowable too?

ashrf16 says

sorry, the answer was already in the comments.

John Moffat says

No problem – I am pleased that you found the answer 馃檪

rohanmehta says

Hello Sir,

In redeemable debt part b, as suggested if take +85 and other cashflows negative the NPV turns out to be Positive.

in this case will the company issue debentures?

whereas if we take -85 the NPV is -ve.

Will the decision change?

John Moffat says

What decision? 馃檪

As far as the IRR is concerned it will not change – the IRR is when the NPV is equal to zero and minus zero is still zero 馃檪

rohanmehta says

Decision about whether the Gplc shall issue debentures or not.

I have this understanding that if IRR is greater than Cost of capital then the company shall issue the debentures and if the case is vice versa then the company shall refrain from doing so.

Due to this understanding i had a doubt that if we get different IRR(+ve/-ve) with different approaches which shall be considered?

please correct me if i have understood it incorrectly.

John Moffat says

But what you have written is not the case. If the company needs to raise money then they have the choice of issuing debentures or using equity finance. We do not compare with the cost of capital (the cost of capital will change anyway depending on how finance is raised).

As far as the IRR is concerned I repeat what I said before – the IRR will be the same regardless of the approach taken!

It may help you to watch my free Paper FM (was F9) lectures on this, because this is revision of Paper FM.

rohanmehta says

Thank you very much. It did help clear my concept.

John Moffat says

You are welcome 馃檪

cswannell says

With redeemable debt, why cant you claim tax relief on any premium you pay at the end of the term?

I.e. take out a loan with a nominal value of $100 and 10% premium, at the end of the term you pay $110. Why cant you claim tax relief on thr extra $10 which is effectively interest paid on maturity?

wajahat14 says

how did we got 18.28 i just can,t seem to understand this concept

John Moffat says

It is the difference between the NPV at 10% (+6.22) and the NPV at 15% (-10.22).

If you have forgotten IRR calculations then looking at the relevant MA (F2) and FM (F9) lectures will remind you.

kaysonkod says

But the difference between +6.06 – (-10.22) = 16.28? So how come it is 18.28 in this instance?

I don’t get it at all

John Moffat says

You are quite correct and I have made a silly mistake in the lecture – I must re-record it. I should have used 16.28 instead of 18.28 and so the answer is slightly different (and the printed answer in the lecture notes does have the correct answer). Sorry about that.

(Although (and I am not using this as an excuse) I would still have almost certainly got full marks in the exam despite the mistake because the approach was correct and the difference it makes is minimal (and the answer is of course only ever an approximation anyway 馃檪 ))

Ruciegbunu says

thanks for clearing that up.

John Moffat says

No problem 馃檪

asher100 says

With regards to example 8, part a, I don’t understand why the PV should equal zero. Shouldn’t the PV be positive for an investor to want to invest?

John Moffat says

Good heavens, no !!

The amount investors will be prepared to pay is the PV of the future expected receipts discounted at their required rate of return.

I suggest that you watch the Paper FM lectures on the valuation of securities, because this is revision from Paper FM (F9).

kim says

Please what’s the difference between yield to maturity and cost of debt

John Moffat says

The first is the return to investors, the second is the cost to the company.

4tcube says

How did you get 18.08?? This is my first time seeing IRR calculated like so.

4tcube says

gotten it.

cswannell says

With redeemable debt, why cant you claim tax relief on any premium you pay at the end of the term?

I.e. take out a loan with a nominal value of $100 and 10% premium, at the end of the term you pay $110. Why cant you claim tax relief on thr extra $10 which is effectively interest paid on maturity?

John Moffat says

Because that is UK tax law!

The interest is tax allowable but the premium is not tax allowable.

salwa1786 says

It鈥檚 16.86 not 18.86

Nigel Wilson says

For example 8(a) the answer is 11.86% not 11.66%. The movement in NPV is -16.28 and not -18.28, due to which the answer you getting is 11.66%

John Moffat says

Thanks – I will correct it when I have time.

However the answer printed in the lecture notes is correct at 11.86% 馃檪

okssana says

Very clear, thank you!

John Moffat says

Thank you for your comment 馃檪