Redeemable debt

Redeemable debt is no longer a perpetuity. Therefore redeemable debt, like convertible debt, debt with a definite end it is calculated using IRR. IRR is calculated using two rates, you choose these, one should give you a + and the other a negative.for IRR to give you the most accurate of the rate/cost of debt.

Thanks So if a question like this came up in the exam, you're saying I can just pluck 2 rates out of thin air?? - Sorry, I'm not trying to be rude, but I just don't understand how that can be possible.

Yes you do if the first comes out with a + novel you go higher If - you go lower Have you not watched the lectures on Redeemable Debt?

No - I literally dont have a lot of time after working all day. I will just leave this one as it's way above my head.

It’s very simple When you see redeemable or convertible it is a debt with an end. So you have to calculate the IRR of the c/flows MV Debt Int (1-t) Redemption You use 2 rates from 1-20 So my advice is…… If you always start with 10% if your answer is + choose 15 if it’s - choose 5%

Sorry, when you say "If your answer is + choose 15"... what do you mean exactly? I won't know what my answer is prior to choosing the rate, so I'm very confused. Also, I did as you suggested and plucked 2 rates out of thin air and I got the answer wrong. 6% convertible loan notes with a NV of $100 and trading at $108.51. On 31 Dec x9 the investors holding the loan notes might convert them into 20 ordinary shares. The ordinary shares are trading at $5.55/share and have a NV of $0.50 per share. Tax is 15% I chose 5% and 7% for the IRR @5%: Y0 Loan note (108.51) * 1 =(108.51) PV Y1-3 After tax interest = 6%*.085 = 5.10 * 2.723 (AF1-3) = 13.89 Y3 Redemption ($5.55 *1.06^3) = 132.20 * 0.864 = 114.22 Total ( -108.51 + 13.89 + 114.22) 19.60 @7%: Y0 Loan note (108.51) * 1 =(108.51) PV Y1-3 After tax interest = 5.10 * 2.624 = 13.38 Y3 Redemption = 132.20 * 0.816 = 107.88 Total ( -108.51 + 13.38+ 107.88) 12.75 IRR= 5 + 19.6/(19.6+12.75) * (7-5) Answer = 6.21% Answer per text book using the rates 10% and 15% - again, they don't say why they have chosen these rates: 10+3.45/(3.45+9.87)*(15-10)=11.3% I thought that maybe I had put the brackets in the wrong place in the calculator, but when I edit my entry and replace my numbers with the ones from the text book, I get 11.3%, so there isn't an issue with my input - it has to be due to the interest rates I have chosen.

Your answer is wrong What is the difference between 5 & 7% Well when you do IRR you really want one NPV that's a + answer and one that is negative You are adding the difference in NPV you should be deducting one from the other So if you have a negative that is like adding them together 15% / 5% NPV -10.4 / 19.6 = 5 + (19.6/(19.6- -10.4))*(15-10). = 11.5% Same as saying = 5 + (19.6/(19.6+10.4))*(15-10) which is 11.5% If you have two positives like you have it works like this: 7% / 5% NPV 12.7 / 19.6 = 5 + (19.6/(19.6-12.7))*(7-5) = 10.7% Both of these are correct - the further out your rates are from each other, the more of an estimate it is

OK so if I get 10.7% in the exam using 5% and 7%, would it be marked right or wrong? Because how am I supposed to know which % will give me a negative result.

It would be marked correctly - it should be within the accepted guidelines But you will get a more accurate result with a + and - Which you do by choosing 15% and another rate it’s simple

OK Great - thank you. I will remember to choose 15%.