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,
Tanya
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Discount factor
12y ago#1For 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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