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hi im having a bit of trouble with redeemable debt. right i know how to do it by using linear interpolation. i just dont understand how you get the discount rate you use. like in a example here they have used 5% and 15%. and in another they have used 10% and 16%. first one issue was 5% bonds, and second had 8% bonds. so i just dont know how they come up with the discount rates
to find IRR, we use the formula,
for a 8% bond, NPV will be zero for DF at 8%.
so we take a value lower than 8 and another value higher than 8.
say, 5 and 15. find NPV for each case(5 and 15). then put the value in IRR.@vipin70 said:
to find IRR, we use the formula,
for a 8% bond, NPV will be zero for DF at 8%.
so we take a value lower than 8 and another value higher than 8.
say, 5 and 15. find NPV for each case(5 and 15). then put the value in IRR.i though so as well but. as i said the first e.g was 8% bond and they used discount rate 10% and 16% to get npv. none are lower than 8.
and the second bond was 5% discount rate was 5% and 15%. none are lower.
I don’t know which example you are talking about, but just because they are 8% bonds does not on its own give an indication of the cost of debt.
Firstly, 8% is the interest on nominal value. For cost of debt we are interested in the market value, not the nominal value. Secondly, for calculating the cost of debt, the interest gets tax relief which makes the cost of the debt lower.Which rates you use for calculating the IRR does not really matter. Differernt guesses for the two rates will give slightly different IRR’s (because it is not linear) but you do not lose marks for this.
ok as long as i dont lose marks for choosing different % rates, than someone else would. then its fine. just wanted to know this.
thanks a lot
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