The appropriate aftertax cost of debt to the company is the interest rate it would have...
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The appropriate aftertax cost of debt to the company is the interest rate it would have to pay if it were to issue new debt today. Hence, if the YTM on outstanding bonds of the company is observed, the company has an accurate estimate of its cost of debt. If the debt is privately placed, the firm could still estimate its cost of debt by (a) looking at the cost of debt for similar firms in similar risk classes, (b) looking at the average debt cost for firms with the same credit rating (assuming the firm's private debt is rated), or (c) consulting analysts and investment bankers. Even if the debt is publicly traded, an additional complication occurs when the firm has more than one issue outstanding; these issues rarely have the same yield because no two issues are ever completely homogeneous. The appropriate aftertax cost of debt to the company is the interest rate it would have to pay if it were to issue new debt today. Hence, if the YTM on outstanding bonds of the company is observed, the company has an accurate estimate of its cost of debt. If the debt is privately placed, the firm could still estimate its cost of debt by (a) looking at the cost of debt for similar firms in similar risk classes, (b) looking at the average debt cost for firms with the same credit rating (assuming the firm's private debt is rated), or (c) consulting analysts and investment bankers. Even if the debt is publicly traded, an additional complication occurs when the firm has more than one issue outstanding; these issues rarely have the same yield because no two issues are ever completely homogeneous.
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Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
Posted Date:
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