- This topic has 5 replies, 2 voices, and was last updated 3 years ago by
.
-
Posts
-
The pre-tax cost of debt has been determined at 4·1% for loan notes B. after unbundling pre tax cost of debt of loan B will increase by 0.3% And the tax rate is 20%.
According to Model Answer post tax cost of debt = (4.1%+0.3%)*80% = 3.52%
But you have told in your lecturer video that after tax cost of debt should not be computed via IRR and not as above method. i am confused sir.
For redeemable debt, the cost of debt is the IRR of the after tax flows.
However there is no mention here as to when the debt is redeemable and so we have no choice but to treat it as though irredeemable, in which case the cost of debt to the company is the pre-tax cost x (1 – t).
(The examiner does often allow the same calculation in answers (when the wording is similar) even when the debt is redeemable. Strictly for redeemable debt that is wrong (and obviously calculating the IRR always would get full marks).)
- The topic ‘Cost of Debt’ is closed to new replies.