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Discount factor

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Discount factor

  • This topic has 1 reply, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • June 2, 2014 at 7:30 pm #172978
    anastell
    Participant
    • Topics: 1
    • Replies: 14
    • ☆

    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

    June 3, 2014 at 8:23 am #173127
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54682
    • ☆☆☆☆☆

    For 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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