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In the YTM (Present Value) approach to cost of redeemable debt:
AKd is the discount rate that equates PV of cash inflows to PV of outflows
BKd equals nominal coupon rate
CKd is always lower than coupon rate
DKd is independent of redemption value
Answer & Solution
Correct answer: A. Kd is the discount rate that equates PV of cash inflows to PV of outflows
1. YTM is the IRR of the bond's cash flows.
2. It is the rate at which PV of after-tax interest + PV of redemption value = current market price.
3. YTM gives a more accurate Kd than the approximation formula.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §5.3.1_
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