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Forums › CIMA Forums › Internal Rate of Return – P2
Hi, I am currently answering a question in my own CIMA text. I used discount factors of 5% and 10%. The 10% gave me a negative answer so I continued on with the question. However when I get my answer it is 9.10%.
The study text used discount factors of 5% and 12%. The study text got an answer of 9.22%. Is there logic in selecting what discount factors to select?
My understanding was that as long as the higher discount factor came to a negative it didn’t necessarily matter.
(I don’t think I am breaking any rules by giving you the question but let me know if I am)
Question
An entity has 8% bonds quoted as $92.00 ex int redeemable at par in three years time. Corporation tax is is paid at 27%.
Calculate the entity’s cost of debt. Give your answer to 2 decimal places.
I think ideally you want one positive and one negative and to have them close together to give a reasonable estimate of the IRR. Perhaps try with 8 and 10 or 9 and 10. Hope this helps.