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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Cost Of Debt
Sir kindly explain these
How many types of debts?
How to calculate cost of debt?
Why we assume the discount factor in case of redeemable bond or preference shares in the calculation of IRR when in question risk free and average market return is given?
You really should watch the free lectures on calculation the cost of debt, because all of your questions are answered in detail there with examples!
I assume that you are referring to long-term debt borrowing, in which case there are really only three types: redeemable; irredeemable; and convertible.
They can have different names – bonds, debentures, etc. – but they all mean the same thing.
As to how we calculate the cost of debt, for irredeemable it is the after tax interest divided by the market value; whereas for redeemable and convertibles we need to calculate the IRR.
As always when calculating the IRR we need to make two guesses and then approximate between them – it is no different for calculating the cost of debt than it is when calculating the IRR for a project. You can assume any two interest rates you like for estimating the IRR (we never assume discount factors – they are from the tables for whatever interest rates we assume!).
Thanks
You are welcome, Muhanwar 🙂