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Hi,
Could someone explain me how do you get to pick up the 2 discount rates when trying to calculate the cost of debt ?
Thanks
‘Someone’ is me – I am the F9 tutor.
Please be patient in future – we do not sit at the computer 24 hours a day (we do have to work) 🙂
As with all IRR calculations, any two interest rate ‘guesses’ will do when calculating the internal rate of return. The answer is only ever an approximation (because it is not linear) but that is irrelevant for the exam.
When calculating the IRR for cost of debt, I normally use 5% as my first guess, and then the second guess either a few % higher or lower depending on whether the NPV is positive or negative at 5%.
HI John,
Thanks for your answer.This is the first time I’m using the forum and I thought any student can reply back.
Have a nice day!
BR,
No problem – I hope you understood my answer to your question OK.
(There are two forums for every paper – Ask the Tutor is to ask questions of the relevant tutor, and the other forum is for students to help each other.)
I hope you are also aware that we provide a complete course of lectures for all papers – free of charge. Our course of lectures for Paper F9 covered everything need to be able to pass the exam well.
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