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Dear John,
I calculated the required return to 12.5% correctly and assumed this would be the figure required to be used for cost of capital calculation for IRR, please explain why this was incorrect.
They used both 10% and 5% and I do not see why those 2 were chosen.
Many thanks
The 12.5% is only the cost of equity.
To calculate the cost of redeemable debt (whether or not it is convertible) we always need to calculate the IRR. When calculating the IRR we always have to make two guesses and which two guesses you make does not matter – they have chosen 5% and 10% but you could have chosen others. Obviously different guesses will give slightly different answers (because the relationship is not linear) but that does not matter in the exam.
Have you not watched my free lectures? I go through all of this in the lectures – they are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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