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Dear John,
In Coeden limited, in calculating the cost of debt and WACC, as the debt is redeemable, shouldn’t we be using the IRR method instead of just multiplying the req. rate (Rf+ spread) with 1-T?
Yes, strictly the answer should calculate the IRR and you would get full marks if you had done.
However, given that the bonds are redeemed at par and that the market value is very close to par, the difference would be minimal (If redemption and market value were the same, then the IRR would give exactly the same answer).
Although it obviously takes longer to calculate the IRR on paper, now that it is computer based it is very quick because you can use the IRR function on the spreadsheet.
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