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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Romage 06/00-IRR
John,
in this question, we need to calculate the IRR of the loan stock, and we have to choose two yield to guess the IRR and I just choose 13% eg the coupon rate, I still got a negative and positive after minus Market value, however the my IRR is 10% but the answer is just 6%, much difference, so could you pls.advise us how we could guess in this case
Thanks
I assume that at 13% you got a negative NPV and therefore you chose a lower rate for your second guess.
Making different guesses will always give a different IRR (because the relationship is not linear), but to get such a big difference suggests that you have made a mistake in your arithmetic somewhere. Are you sure that you were using the after-tax interest flows?
Also, I would have started with a lower guess than 13%. Because of the tax relief on the interest, the IRR has to be quite a bit lower than 13%. I would have made my first guess at somewhere around 13 (1 – 0.31) = 8.97% (so 9%).
I used the interest before tax flows, as i think i will calculate the kd before tax, is it ok
No – it isn’t OK.
In order to calculate the WACC you need to calculate the cost of debt, which is always after tax.
I do suggest that you watch the free lectures on the calculations of the cost of capital.
John,
May be you get me wrong as imean that i will calculate the irr or kd before tax, but in wacc, i muitiply the kd with (1-t), is that ok
No it is not OK.
You can only multiply Kd by (1-t) if the debt is irredeemable.
If the debt is redeemable then you cannot simply use the WACC formula on the formula sheet – you need to calculate the IRR of the after tax flows (and replace Kd(1-t) with this).
I again suggest that you watch our free lectures on the cost of capital (and if necessary the relevant F9 lectures also, because this bit is revision of F9).
Much thanks for kind suports always
You are welcome 🙂