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Hi Tutor,
It is a bit confusing looking at the answer to this question asking for “What is the return to investors (Kd)?”
The answer states that “Kd = IRR”, does that means investor is looking for a zero return?
Many thanks.
Best regards,
KennyIt is fundamental to both Paper AFM and Paper FM, that the market value is the PV of future receipts discounted at the investors required rate of return.
Therefore the required rate of return must equal the IRR of the flows. (And where you get ‘zero return’ from I have no idea – the IRR is certainly never a zero return!!).
It seems you are using the notes without watching the lectures. If that is the case then you are wasting your time. The notes are lecture notes not a study text, and it is in the free lectures that I work through the examples, and explain and expand on the notes. If you are not watching the lectures for any reason then you need to buy a Study Text from one of the ACCA Approved Publishers and study from there.
Hi John,
Yes, I am in China so unable to access to youtube. I am cross-referencing the notes with Kaplan study text and exam kit. I am aware of the time value of money.
As we know, IRR is the discount rate at which the NPV of an investment is zero, so if IRR = the return to investors (Kd), this means that the investor gets back only its initial investment without further return, for example, the risk-free and risk-related premium in accordance with CAPM. This is the part I am confused with.
Best regards,
KennyYou should be able to access the lectures if you use a VPN.
Investors get whatever return they require. It is the investors who determine the market value by discounting the receipts at their required rate of return.
Calculating the IRR of the flows is ‘working backwards’ and is determining the rate of return that they are requiring.
Got it. Thanks John!
Just did.
I am trying to understand the logic behind the formulas, else, they may just slipped away from my memory easily.
Best regards,
Kenny
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