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Dear Mr. Moffat,
I am working on question 57 DD Co (12/09) from the BPP Revision kit and the discount factor used for calculation of cost of debt of Bond A is 10% while the annual interest of the bond is 9 %. The taxation should be ignored. I cannot understand why 10% is the discount factor.
Could you help me with that matter ?thanks,
TanyaFor redeemable debt, the cost of debt is calculated by getting the Internal Rate of Return.
As usual for IRR that means making two guesses and then approximating.I do not know what guesses BPP made – I do not have BPP books – it seems from what you have typed that they guessed at 10% which is fine. The examiner guessed at 11% and 9% in his answer, which is also fine.
It might be of help to watch my free lecture on calculating the cost of debt.
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