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Hi,
Can anybody explain to me how is Kd calculated in Q3 (a) (Dec12 exam)?I don’t get why 2 IRRs are calculated? One at DF 7% and another at 6%.
I am also confused with this too,
“After-tax Kd = 6 + ((7 – 6) x 1·93)/(1·93 + 2·54)) = 6 + 0·43 = 6·43%”https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/f9/exampapers/F9_2012_dec_a.pdf (bottom of page 14)
Have you watched the free lectures on how to calculate the cost of debt when it is redeemable? If not then you really should!
The examiner has not calculated two IRR’s at all. He has calculated the NPV’s at two rates of interest, and then approximated between them in the standard way to determine at what rate of interest the NPV is zero.
To get the cost of debt we need the IRR. The definition of the IRR is that it is that rate of interest for which the NPV is zero.
As you will know from the lecture, to find the IRR we choose two rates of interest and then approximate between the two on the assumption that it is linear. Any two rates of interest will do – he has chosen 6% and 7%, but any two ‘guesses’ will do.
Oh yes. That is true. I did my F9 tuition a year ago (now I am only practicing) so I completely forgot that this is the way you calculate IRR. Silly me.
Thank you, John.
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