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Dear, Mr Moffat
Narrowing down to cost of existing debt only through irr.
As the corporation tax is not explicitly mentioned. Seems like it is 20 percent judging from the tax charge.
I’ve chosen the discount factors 4% and 2%. The npv I get (1.78) and 4.04 respectively. When I place them in Irr. I am getting kd of 3.4 instead of 4.5 which is the answer.
Where am I going wrong plz. If my answer was close to 4 % wouldn’t have bothered but this seems like a significant deviation.
You have calculated the cost of debt, but this is not what the question requires.
What we need is the return to the bond holders (because it is the rate of return that will determine the market value of the new debt). Investors are not affected by company tax and so the rate of tax is irrelevant and you should use the flows ignoring tax.
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