Cost of debt??? current, before, issue, right

dvilayphet

When calculating WACC, which one do you take as before tax cost of debt:

1/ YTM of firm's long-term debt
2/ Coupon rate on firm's current long-term debt
3/ YTM of firm's short-term debt
4/ Coupon rate on firm's current short-term debt
5/ Expected YTM of bond if firm is to issue more bond

That's all I can think of right now. Is there a priority principle for this thing?

SeanWest

I would use #5 myself. Can't give any proof though- I just seem to remember we use the marginal cost of debt, which is the cost of new debt.

spreads

#5 makes sense. Ke is an investors required return on equity and the ytm is, definitely for future debt, the required rate of return (Kd) of a bond holder.

Newhuman

If they don't give #5, which then would you guys use?

MiniMe7

I would try to sync up the time to maturity. If it's a long term project, use long term debt.

Again, it would be nice if someone could definitely say for sure.

eoin

There's definitely a pecking order to the choice if you are not given K(d) from the get go.

1. I would first use the YTM on future issues (Like we said above)
2. YTM on most recent issue
3. If given S/T Debt & L/T Debt and int I would calculate the weightings of each portion of debt and then multiply that by the firm's int pmt.
4. YTM on S/T Debt

I think you would use the coupon pmts as a last resort. This is from the top of my head so let me check my notes.

kickthatcfa

Straight from CFAI "The before tax required return on debt is typically estimated using the expected YTM of the company's debt based on current market values"

Not much clarity but I would stick with 1, 2, and 3 in that order. Google didn't help much either. Apparently the cost of debt is loosely defined.

iteracom

Well the fact that it's loosely defined is rather comforting- it means they'll have be more specific about it.