Cost of Debt

[sahildh]

Is the cost of debt calculated on the yield to maturity or the actual discount rates in case of redeemable debt stock ?

 

[Vivek Rana]

YTM and Discount Rates are calculated by investors (Investing Decision ).
These are not used by issuers to calculate cost of debt (Financing decision).
Issuers calculate cost of debt as
Kd = i ( 1 - Tc)
where
Kd = Cost of debt
i = interest rate / coupon
Tc = Corporation Tax Rate

 

[sahildh]

YTM and Discount Rates are calculated by investors (Investing Decision ).
These are not used by issuers to calculate cost of debt (Financing decision).
Issuers calculate cost of debt as
Kd = i ( 1 - Tc)
where
Kd = Cost of debt
i = interest rate / coupon
Tc = Corporation Tax Rate

But in some of the previous year papers I have encountered sums where the interest rates are clearly given and still they find out the YTM and then calculate the cost of debt on it. Why is it so then ?

 

[Simon James]

Cost of debt is typically calculated as the rate of interest adjusted for the tax break ie i*(1-t).

However when calculating WACC we are normally interested in the market cost and so use the yield (ie YTM) to allow for the increased cost of issuing debt if it is issued below par.

 

[sahildh]

Cost of debt is typically calculated as the rate of interest adjusted for the tax break ie i*(1-t).

However when calculating WACC we are normally interested in the market cost and so use the yield (ie YTM) to allow for the increased cost of issuing debt if it is issued below par.

So Sir we can say that that if the MV < redemption value then we will calculate at YTM, & if the MV > redemption value then we will calculate normally at interest rate. Right ?