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Ques – A company has outstanding $660,000 of 8% loan notes on which the interest is payable annually on 31 December. The debt is due for redemption at par on 1 January 20X6. The market price of the loan notes at 1 January 20X3 was $95. Ignoring any question of personal taxation, what do you estimate to be the current cost of debt?
My quest – Sir I want to ask how can we find the discounting factor here? is it 8% ?You need to set up the cash flows as I explain in my free lectures on the cost of debt calculations, and then calculate the IRR.
You can either discount at two interest rates – any two rates will do, I would choose 5% and 10% – and then approximate to the IRR.
Alternatively, if it is part of a Section C question you can use the IRR function on the spreadsheet.
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