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Hello….
With regards to calculating the cost of the redeemable debt (10% loan notes) I noticed in the solution the examiner using a discount rate of 10% and 5%.
Where did he get this rate? Is this rate a matter of personal choice in the exam?
Thanks! 🙂
If you watch my lecture on this, you will see that if you want to calculate the IRR then you can use any two ‘guesses’. I always use 10% as one guess (simply because it is in the middle of the tables) and then either 5% or 15%. However, any two guesses will do.
Using different guesses will give slightly different answers (because the relationship between the NPV and the interest rate is not linear), however this does not matter in the exam (or in practice). (Although if you get an answer more than 1% different from the examiners answer then you will almost certainly have made a mistake in your arithmetic 🙂 )
I had a feeling I could use any two rates I wish. I just needed to clear it up for safety purposes in the exam.
I think I would follow the examiner and use his 10% and 5% from now on.Thanks for clearing it up! 🙂
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