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When Calculating Cost Of Debt In Part A, In IRR Calculation, I Used 10% & 15% As Discounting Rates Which Gave Me Kd Of 1.5% As Opposed To Kaplan’s Kd Of 4.4% By Using 4% & 5% As Rates.
Is It Acceptable In Examination?
No.
You would not lose all the marks provided your workings were correct, but you would not get full marks.
The reason is that any calculation of IRR is only approximate (as I explain in my lectures), but your two ‘guesses’ were so unrealistic as to make the approximation too poor.
You know that the risk free rate is 4% and so you would expect the cost of debt to be a bit more than 4%. Also, you know that the cost of equity is 7% and so the cost of debt will be less than 7%. Had you used 4 and 5%, or 4 and 6%, or 4 and 7%, you would have got slightly different answers but you would then have got full marks.
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