CAF-7 · Chapter 9 · Question 5 of 15
When calculating the cost of redeemable debt (like bonds maturing in 5 years), which financial technique must a company use to find the true cost of that debt?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Internal Rate of Return (IRR) of the after-tax cash flows
Explanation
Redeemable debt involves multiple cash flows over time: initial issue price (inflow), annual interest payments (outflows), and final redemption (outflow). Finding the precise percentage cost of these combined flows requires an IRR calculation.
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