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cost of debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › cost of debt

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • December 3, 2017 at 2:26 pm #419943
    Moloantoa
    Member
    • Topics: 30
    • Replies: 32
    • ☆☆

    dear tutor

    with reference to question 5 (a) on December 2014 paper, why is it that tax is deducted from the cost of debt when calculating the IRR ?? for the market value??

    December 3, 2017 at 7:06 pm #420009
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    Tax has not been deducted when calculating the market value – the market value is given in the question!!!

    Tax is deducted from the interest payments when calculating the cost of debt (the IRR calculation). We always do because we are calculating the cost of debt to the company and the company gets tax relief on the interest payments, which makes the cost lower.

    You really do need to watch my free lectures on the calculation of the cost of capital – there is always a lot of cost of capital calculations in the exam.

    December 3, 2017 at 7:30 pm #420023
    Moloantoa
    Member
    • Topics: 30
    • Replies: 32
    • ☆☆

    so if we calculate the cost of debt to investors it’s only then we ignore tax??? and how will I know that now we are calculating the cost of debt for the company not the investors??

    December 4, 2017 at 7:17 am #420071
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    There is no such thing as ‘cost of debt to the investors’!!! How does it cost the investors anything – they are receiving income!

    Again, you really should watch my free lectures.

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘cost of debt’ is closed to new replies.

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