|
|
Post by ccfc88 on Feb 15, 2016 12:40:52 GMT
Hi all,
First time poester looking for help!!
In a question
An entity has some 10% bonds quoted at $95.00 ext int redeemable at par in five years' time. Corporation tax is paid at 31%. Calculate the entity's cost of debt.
I understand the calculations and the process to find the answer however I am not sure on how to decide which discount factors to use. In the example answer they use 6% and 10% however in other questions they use 5 and 10, 5 and 12....
Thanks oin advance!!
Luke
|
|
bmer
Junior Member
Posts: 64 
|
Post by bmer on Feb 15, 2016 13:01:41 GMT
for IRR the aim is to use a % that produces a negative NPV and one that produces a positive NPV, the advice is that they shouldn't be more than 5% apart.
|
|
|
|
Post by ccfc88 on Feb 15, 2016 14:31:27 GMT
Thank you,
So in the example question above the answer is given as below
Time Cash flow DF 6% Pres value DF 10% Pres value
0 -95 1 -95 1 -95
1-5 6.9 4.212 29.0628 3.791 26.1579
5 100 0.747 74.7 0.621 62.1
8.76 -6.74
=6%+((10%-6%)*(8.76/(8.76+6.74))
8.260645161
However if you use 5% and 10% you get a different answer, and when answering to 2 decinmal places this will make the answer incorrect, especially in an OTQ.
Time Cash flow DF 6% Pres value DF 10% Pres value
0 -95 1 -95 1 -95
1-5 6.9 4.329 29.8701 3.791 26.1579
5 100 0.784 78.4 0.621 62.1
13.27 -6.74
=5%+((10%-5%)*(8.76/(13.27+6.74))
8.315842079
Apologies if I have missed something or mis-calculated.
Thanks!
|
|
bmer
Junior Member
Posts: 64
|
Post by bmer on Feb 15, 2016 14:36:45 GMT
I the exam I sat if required to calculate the IRR you were given the percentages and NPVS therefore you calculated with given information
|
|
|
|
Post by Nick Best on Apr 28, 2020 13:23:32 GMT
The IRR is an approximation only and the answer will vary depending on the percentages you choose as in your example.
Hopefully you'll be given the percentages in the exam as with bmer. If not then choose two 'reasonable values' not too far away from the IRR and either side of it. (The closer you are to the IRR the more accurate your answer will be.
If you get a slightly different answer, the CIMA system allows for a range of possible answers so you'll be fine. If multiple choice, choose the percentage closest to that you calculate and you should be fine.
|
|
