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Irredeemable debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Irredeemable debt

  • This topic has 5 replies, 4 voices, and was last updated 13 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • December 6, 2010 at 2:30 pm #46689
    karenlaing
    Member
    • Topics: 40
    • Replies: 36
    • ☆☆

    Hi
    I have always done the IRR based on the value of one loan note, however yesterday looked at answer to a q in R&R and it was based on entire value of debt and interest, so in Dec Mock exam did it this way – answer was based on one loan note.
    My Q is – does it matter? Will I be safe enough to always base on one loan note and interest etc.?

    December 7, 2010 at 1:00 am #72924
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 87
    • ☆☆

    Hi Karen,

    Your posting has the caption IRREDEEMABLE debt

    IRR (Internal Rate of Return) is NOT used to calculate the cost of IRREDEEMABLE debt. IRR is used to calculate the cost of REDEEMABLE debt after tax.

    Cost of IRREDEEMABLE Debt Model:

    Kdat (to Company) = *** Nominal Annual Interest (1 – t ) / M Price p.u.

    *** (NI after tax)

    Regards, Kevin Kelly

    December 7, 2010 at 1:05 am #72925
    karenlaing
    Member
    • Topics: 40
    • Replies: 36
    • ☆☆

    Apologies for confusion – I meant redeemable debt, will it matter if I base the
    IRR on one loan note as has been the way with all of the questions I have covered (except one) or are there circumstances when the totals must be used?

    December 7, 2010 at 11:58 am #72926
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 87
    • ☆☆

    Just use the cash flows pertaining to the one bond (loan note) given in the question and you’ll be perfectly ok.

    regards, Kevin Kelly

    March 16, 2012 at 9:39 pm #72928
    rishi001
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    hi anyone can help me in irredeemable debt in cost of debt?

    March 18, 2012 at 2:08 pm #72929
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54682
    • ☆☆☆☆☆

    What is it you want to know?

    If it is irredeemable then it is repayable, and to calculate the cost of debt you need to set up the after-tax flows (the interest is tax allowable) and calculate the Internal Rate of Return.

    Have you watched the OpenTuition lectures on it?

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