CFA curriculum Reading 23 Q40

CFA Level II
#1

Hi, Why do we have to use the cost of the new long- term debt to calculate the WACC instead of the cost of the existing coupon rate? Thanks S

#2

Because if you issue new debt, you’ll have to issue it at the current YTM.

The coupon rate on existing debt tells you nothing about the cost of debt. You can issue bonds with any coupon rate you want: 2%, 5%, 10%, 50%. The YTM tells you your cost of debt, not the coupon rate.

#3

Ok perfect as usual!

Thank you so much

S

#4

My pleasure.