breakpoint

seeksomethingsimple · November 11, 2009, 3:00am

could someone explain the rational behind breakpoint calculation?

revenant · November 12, 2009, 2:26am

It basically tells you at what level of capital raised will your cost changed. E.g for debt’s cost of capital 40% Debt, 60% Equity Amt of new Debt ($m) 100 to 199 -> 4% 200 to 299 -> 5% 300 to 399 -> 6% Lets say you are only concern about the cost of debt. You want to know the levels of capital raised that will increase your cost of debt. Given the above, you know that the breakpoints are $500m (200/0.4) and $750m (300/0.4). This means that if you were to raise beyond $500m, your debt will increase from 4% to 5%. And if you were to raise beyond $750m, your debt will increase from 5% to 6%.

seeksomethingsimple · November 12, 2009, 3:26am

that 0.4 in the denominator is the 40% of debt? Thanks

revenant · November 12, 2009, 5:08am

To be more precise, its 40% of capital (debt in this case).

seeksomethingsimple · November 12, 2009, 6:25am

Thanks revenant

revenant · November 12, 2009, 6:41am

No problem, it took me more than 3 reads to understand something so simple and I concur your nickname.

gazhoo · November 13, 2009, 7:33am

Hi, You wrote: This means that if you were to raise beyond $500m, your debt will increase from 4% to 5%. Shouldn’t this be “cost” of debt?

revenant · November 14, 2009, 4:48am

gazhoo Wrote: ------------------------------------------------------- > Hi, > > You wrote: This means that if you were to raise > beyond $500m, your debt will increase from 4% to > 5%. > > Shouldn’t this be “cost” of debt? Yes it is, sorry for the confusion.

waddi08 · November 14, 2009, 7:05pm

Thanks for the explanation revenant!