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The cost of debt i know to be gotten through interpolation IRR but sometimes i see them use the coupon rate net of tax as cost of debt. Pls i am confused about this.
@ nwafor samuel prince this is purely a coincidence … the coupon rate is given to calculate the interest but however for e.g the debt might be redeemable in 10 years, the cost of debt is used calculating 10%… often it is based on the years the debt is redeembale…
but let me tell you one thing, the DFs that are used to calculate the cost of debt is purely a guess… u must guess a % that will give u a +ve NPV and one which will give u a -ve NPV.
I hope you’ve understood what I trying to say!! 😀
Pls its this way. Say an 8% redeemable loan or bond will now be solved as having a 5.6% cost of debt (8% net of tax). This is supposed to be done by IRR.
Pls its this way. Say an 8% redeemable loan or bond will now be solved as having a 5.6% cost of debt (8% net of tax). This is supposed to be done by IRR.
Hi can I ask you a question about Question 1 too? I understand most of the IRR except where the figure for 110 comes from for t10 redemption. When I looked at the answer it was made up of 100 recemption @ par plus Redemption premium of 10%. I could not see any mention of a redemption premium in the question so is this automatically added to any bond that is redeemed? Just want to know if I need to do that in every question or just this one. Also where does the 10% come from?
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