Cost of Debt Calculation

CFA Level I FRA
#1

Hi folk) I have came across very spicific calculation Cost of Debt . Here it is Net Income /Liabilities.Is it appropriate way of calculation .Because it is more often accepted to use the yield to maturity on company’s bond.Do we have the right to use both methods of calculation cost of debt working out WACC?

Thanks in advance)

#2

I’ve never seen this before. Where did you come across it? As far as I have seen, it would be totally inappropriate to use this “cost of debt” in the WACC calculation.

#3

i dont now whether it is acceptable to write the link or not ,but here it is http://m.youtube.com/watch?v=EM8RXNgyeLo

#4

I’m not too sure about his video (I didn’t watch it fully). I can say, though, that through two finance degrees, and what I’ve covered so far in the CFA curriculum, I’ve never heard (or can’t remember) of calculating it his way (not saying that it’s definitely wrong, but it’s pretty uncommon at least). It seems like he is using a return ON debt and return ON equity as proxies for cost of debt (required return on debt) and required return on equity, respectively.

I would avoid his method and stick with the method in CFAI (using YTM). Maybe someone else could weigh in here.

#5

To put it mildly, this calculation makes no sense.

I’m trying hard to forget I ever saw it. I encourage you to do the same.

#6

This is what I thought, but because he’s referring to himself as “Dr. so and so”, I assumed he had a degree. I left the possibility that maybe I just hadn’t heard of this method (except it never showed up anywhere, including a course textbook on the theory of finance). In any case, it’s kind of scary that he’s teaching the wrong stuff…

#7

I didn’t listen to the video, but the original description is crazy talk: I earned more income this year so, _ consequently _, my cost of debt increased?

_ Tommyrot! _

As for him referring to himself as “Dr. so and so”: years ago I worked for a gentleman who had a PhD in physics who didn’t understand a simply linear equation with one independent variable. Many PhDs haven’t a clue.

#8

Must have been a fly-by-night pay-for-your degree school…

#9

Which one: this finance guy’s, or my physics guy’s?

#10

I just posted a comment on that video, but as it’s two years old, I doubt that the author will notice it.

Too bad: he’s teaching garbage.

#11

Probably this “finance” guy, but who knows. I’m sure the physics guy went to a legitmate school (not necessarily good) and somehow fell through the cracks.

To your other post: I also thought about messaging him or commenting on the video, but I decided against it. As you mentioned, he might not see it. Can’t hurt to try, though.

#12

So If I am to calculate WACC including Cost of Debt,for instance,for Apple ,I should find information about bond yield of this company?Whether I should use another information working out Cost of Debt?Yahoo Finace as I understand dont present information about bond yield

#13

Yes, you would have to find the yield to maturity on bonds for the company whose cost of debt you are trying to estimate. The cost of debt would be the yield to maturity of the company’s bonds multiplied by (1-corporate marginal tax rate).

If you cannot find the yield to maturity, you can use the debt-rating approach. Suppose you are looking to calculate the cost of debt for a company but cannot find its yield. The company is rated BB, its debt has an average duration of 20 years, and its marginal tax rate is 30%. You can find the yield to maturity on bonds that are rated BB with a duration of 20 years. Suppose this is 5%. You would multiply this with (1-0.30) and calculate the cost of debt for the company as 3.50%.

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