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....
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.
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