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5a requires to calculate the WACC.
When calculating the loan notes which are redeemable we have to use IRR which I understand. However, why is the acquisition cost of loan notes ($103.50) (ex interest basis) and not ($100) (nominal value) in the IRR calc.
Also, on a open tuition revision test mock exam a question came up saying whether the
following statement was correct– IRR is can be calculated precisely using the linear interpolation.
I thought this was correct but it was incorrect per the test result. Is it because linear interpolation does not calculate it accurately?First question:
It is because investors determine the market value and we are calculating what rate of interest makes the present value of the future receipts equal to the market value.
Second question:
The relationship between the NPV and the rate of interest is not linear. We calculate IRR on the assumption that it is linear and the result is therefore only approximate.
You really should watch the free F9 lectures – both of the above points are explained in detail in the lectures.
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