In the proposed solution, the examiner calculates Cost of Debt using IRR approach. Tax relief (1-T) is not taken into account. Even, explicitly it is written Cost of debt is 6.48% (which should be the Return to Investors).
However, after that in WACC calculation tax relief is considered.
In your lectures, you explained very thoroughly this topic. I assume that we should take into account tax relief (1-T), at the time when we calculate IRR (Cost of debt) for redeemable debt?
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Tonpantau Dec 2022
3y ago#1Strictly, what the examiner has done is wrong in that because it is redeemable debt he should have calculated the IRR of the after-tax flows. The examiner accepts this and made it clear that you would have got full marks for calculating the IRR properly.
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