Cost of Debt

Mergers and acquisitions - Financing options 1 It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

Mergers and acquisitions - Financing options 1 Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.

Mergers and acquisitions - Financing options 1 Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.

Economics of new nuclear power plants - Capital costs 1 Some analysts argue (for example Steve Thomas, Professor of Energy Studies at the University of Greenwich in the UK, quoted in the book The Doomsday Machine (2012 book)|The Doomsday Machine by Martin Cohen and Andrew McKillop ]) that what is often not appreciated in debates about the economics of nuclear power is that the cost of equity, that is companies using their own money to pay for new plants, is generally higher than the cost of debt.The Doomsday Machine, Cohen and McKillop (Palgrave 2012) page 199 Another advantage of borrowing may be that once large loans have been arranged at low interest rates - perhaps with government support - the money can then be lent out at higher rates of return.

Merger - Financing options 1 *It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

Merger - Financing options 1 *Issue of stock: it increases financial slack, may improve debt rating and reduce cost of debt. Transaction costs include fees for preparation of a proxy statement, an extraordinary shareholder meeting and registration.

Merger - Financing options 1 *Shares in treasury: it increases financial slack (if they don’t have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs.

Corporate finance - Capitalization structure 1 The cost of equity (see Capital asset pricing model|CAPM and arbitrage pricing theory|APT) is also typically higher than the cost of debt - which is, additionally, a deductible expense – and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.See:[ Balance-of-Financial-Instruments-Long-Term- Management-Market-Volatility-Proposed-Changes asp Optimal Balance of Financial Instruments: Long-Term Management, Market Volatility Proposed Changes], Nishant Choudhary, LL.M

Leverage (finance) - Worked example 1 Interest rate differential = Return on investment less Cost of debt = 5% - 4% = 1%

Business valuation - Weighted average cost of capital (WACC) 1 The weighted average cost of capital is an approach to determining a discount rate. The weighted average cost of capital|WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s interest (finance)|cost of debt and cost of stock|equity. The weighted average cost of capital|WACC must be applied to the subject company’s net cash flow to total invested capital.

Modigliani-Miller theorem - Proposition II 1 * r_D is the required rate of return on borrowings, or cost of debt.

Working capital management - Capitalization structure 1 The cost of equity (see Capital asset pricing model|CAPM and arbitrage pricing theory|APT) is also typically higher than the cost of debt - which is, additionally, a deductible expense – and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.See:[ Optimal-Balance-of-Financial-Instruments-Long- Term-Management-Market-Volatility-Proposed- Changes-3765.asp Optimal Balance of Financial Instruments: Long-Term Management, Market Volatility Proposed Changes], Nishant Choudhary, LL.M

Time value of money - Calculations 1 The rate of return in the calculations can be either the variable solved for, or a predefined variable that measures a discount rate, interest, inflation, rate of return, cost of equity, cost of debt or any number of other analogous concepts. The choice of the appropriate rate is critical to the exercise, and the use of an incorrect discount rate will make the results meaningless.

History of private equity and venture capital - SL and the shutdown of the Junk Bond Market 1 This made the cost of debt in the high yield market significantly more expensive than it had been previously.Altman, Edward I

Convertible bond - Valuation 1 A simple method for calculating the value of a convertible involves calculating the present value of future interest and :wikt:principal|principal payments at the cost of debt and adds the present value of the warrant (finance)|warrant

Working capital management - Capitalization structure 1 The cost of equity (see Capital asset pricing model|CAPM and arbitrage pricing theory|APT) is also typically higher than the cost of debt - which is, additionally, a deductible expense – and so equity financing may result in an increased hurdle rate which may offset any reduction in cash flow risk.See:[ Optimal-Balance-of-Financial-Instruments-Long- Term-Management-Market-Volatility-Proposed- Changes-3765.asp Optimal Balance of Financial Instruments: Long-Term Management, Market Volatility Proposed Changes], Nishant Choudhary, LL.M

Undercapitalization - Capital sources 1 * Debt is more expensive. The cost of debt is lowest with secured, long-term loans or use of personal savings, higher with unsecured loans, credit card loans and cash advances, and with factoring (finance)|factoring accounts receivable.

Tax shield - Case B 1 The reason that he was able to earn additional income is because the cost of debt (i.e. 8%) is less than the return earned on the investment (i.e. 10%). The 2% difference makes income of $80 and another $100 is made by the return on equity capital. Total income becomes $180 which becomes taxable at 20%.

Adjusted present value 1 Technically, an APV valuation model looks similar to a standard Discounted cash flow|DCF model. However, instead of weighted average cost of capital|WACC, cash flows would be discounted at the unlevered cost of equity, and tax shields at either the cost of debt (Myers) or following later academics also with the unlevered cost of equity. I-0488-E.pdf

Adjusted present value - APV formula 1 The discount rate used in the second part is the cost of debt financing by period.

Adjusted present value - APV formula 1 + Present Value of Debt's Periodic Interest Tax Shield discounted by Cost of Debt Financing %

Cost of capital - Summary 1 A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital

Cost of capital - Summary 1 For companies with similar risk or Bond credit rating|credit ratings, the interest rate is largely exogenous (not linked to the cost of debt), the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown

Cost of capital - Summary 1 Once cost of debt and cost of equity have been determined, their blend, the weighted-average cost of capital (WACC), can be calculated. This WACC can then be used as a Annual effective discount rate|discount rate for a project's projected cash flows.

Cost of capital - Cost of debt 1 Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are After Taxes|after-tax as well)

Cost of capital - Cost of debt 1 The yield to maturity can be used as an approximation of the cost of debt.

Merger and acquisitions - Financing options 1 *Issue of debt: It consumes financial slack, may decrease debt rating and increase cost of debt. Transaction costs include underwriting or closing costs of 1% to 3% of the face value.

Return on equity - The DuPont formula 1 So if the firm takes on too much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases.Woolridge, J

Bankruptcy costs 1 In the Trade-Off Theory of capital structure, firms are supposedly choosing their level of debt financing by trading off these bankruptcy costs of debt against tax benefits of debt. In particular, a firm that is trying to maximize the value for its shareholders will equalize the marginal cost of debt that results from these bankruptcy costs with the marginal benefit of debt that results from tax benefits.

Countrywide Financial Corporation - Secondary market disruption 1 There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels.

Hamada's equation 1 # The discount rate used to calculate the tax shield is assumed to be equal to the cost of debt capital (thus, the tax shield has the same risk as debt). This and the constant debt assumption in (1) imply that the tax shield is proportionate to the market value of debt: Tax Shield = T×D.

Public-private partnerships - Controversy 1 Making a simple comparison, however, between the government’s cost of debt and the private-sector WACC implies that the government can sustainably fund projects at a cost of finance equal to its risk-free borrowing rate

Pecking Order Theory - Theory 1 This does not however apply to high-tech industries where the issue of equity is preferable due to the high cost of debt issue as assets are intangible Brealey RA, Myers SC, and Allen F (2008)

Cost of debt - Cost of debt 1 Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well)

Weir Group - History 1 Worthington-Simpson was profitable, but did not cover the cost of debt.

Affordability of housing in Canada - Market-based affordability 1 Mortgage lending institutions define affordability in terms of potential home buyers consider the relative cost of debt based on interest rates and average household incomes

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