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Hi,
As far as I am aware of, the IRR is used to calculate the rate of return for which a project breaks-even, i.e. NPV=0. So, then why exactly do we use the IRR for calculating the cost of redeemable debt, i.e. k_{d} ? I don’t understand.
Also, in the F2 exam, will we be given both the IRR formula as well as the discount factor tables (both cumulative present value table and the other one/present value table) ?
Thanks 🙂
Hi,
Have you gone through and looked at the videos as I think this is covered in there. When looking at the return on the redeemable debt, the present value of the cash returns in the futures (interest plus redemption) will need to be worth the same as the amounts paid. This is effectively the same as the IRR and why we then use it to calculate the cost of debt.
Thanks
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