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Dear Tutor / group members,
I have a problem with determining which rate of return to start with in calculating the I.R.R which will be the cost of the redeemable debt. The BPP study text suggests treating the debt as irredeemable first but go on to ignore this in some problems and I’ve failed to understand it clearly.
Thanks for your help in advance.with IRR method ,u should spread it to several years and discont it with discount factor.eg.Y0,Y1,Y2…. and next u need to calculate the NPV of Market value ,interest of every year, the last capital repayment.be cautious of the interst rate,as it should consider the tax factor.I donnt really know so called”treating the debt as irredeemable first”,because whether is redeemable or not,it should always be pointed out.I hope can help u
fbwikizo:
It does not matter what two guesses you use when calculating the IRR. (Different guesses will give slightly different IRRs because it is not linear, but will still get full marks).
What BPP suggests is sensible. To be honest, for cost of debt calculations, I always make my first guess at 10% and then the second guess at 5% – but it does not matter as long as it is clear from your working what you are doing.
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