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I have a question about example 8b.
I understand that the cost of redeemable debt is calculated using the IRR after tax saved on interest paid.
However, for the cash flows, why at time 0 is there an outflow, when the company receives the debt finance. When the cash is repaid at a premium, why is there an inflow? Why are the cash flows shown from the investor’s perspective when calculating the cost of debt for the company?
Thank you.
As I explain in my lectures, we set the flows up that way simply because we are used to the flows that way when we calculate the IRR for projects.
However, it makes no difference whatsoever if you prefer to set up the flows the way you suggest. You will still get the same IRR because minus zero is the same as plus zero 🙂
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