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When we calculate the cost of debt for redeemable debentures which are not trading at market value, i understand that i have to calculate 2 sets of net present values before IRR can be calculated.
My question is, when we calculate this, should we be looking from issuers’ or holders’ perspective ?
I am looking from the issuers’ perspective, so i feel that the cash flow for T0 should be +ve, and the cash flows for the interests paid and redemption sum should be -ve. But this is not the case in most of the reference materials.
Can you please help to clarify…?…thanks..
It does not matter which way round you have the cash flows.
The reason we start with negative and then have positive, is that when we calculate IRR’s for projects that is the case, and so it feels more normal.
The reason however that it makes no difference is that the IRR is when the NPV is zero, and minus zero is the same as plus zero 🙂
You have already asked this in a separate question, and I have answered. Please do not ask the same question in two different places.
For the benefit of anyone else reading this:
It depends why you are calculating the IRR. If you are doing it to estimate the return required by investors, then you ignore the tax (because the investors do not get tax relief).
If (more likely) you are doing it to calculate the cost of debt to the company, then you take the after tax interest because the company does get the benefit of tax relief.
Hi sir,
When we calculate IRR using trial and error, we need to derive at two discount rates, one resulting at +ve NPV and another one resulting at -ve NPV right…?…
What i wish to clarify is is there only one IRR for one debt instrument…?…Or there will be more than 1 IRR…?
This is because more than likely there will not only be 1 discount rate which can give a +ve or -ve NPV.
Or should we keep trying until we get the discount rate which result in +ve or -ve NPV which are the nearest to zero…?
Thanx…
You really need to watch the Paper F2 lectures on calculation of the IRR.
You need to ‘guess’ at two rates and then approximate between them.
They do not need to give one +ve and one -ve (although this would be a better approximation) two +’s or two -‘s will work just as well.
In general there can be any number of IRR’s, but for any cost of debt calculation there will only be 1.
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