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-   -   Cost of Debt - Correct Formula to use (https://www.askmehelpdesk.com/showthread.php?t=196863)

  • Mar 20, 2008, 07:22 PM
    macca111
    Cost of Debt - Correct Formula to use
    The question is "What is the cost of Debt"

    I have reached a solution based off the book that is

    Cost of Debt = (I + (M-NP)/n) / (M + NP) / 2

    I = Dollar Return
    M = Maturity Value
    NP = Net Proceeds of issue
    n = years

    This is an approximation to finding the cost.

    However, another book states it slightly different:

    Cost of Debt = ( I (1-t) +(RV-SV) /n) / (RV+SV) /2

    RV = Realisable value (ie they used $104 as this is the current price, not the maturity value)
    SV = same as NP above

    As you can see there is a slight difference to the final answer I would receive due to RV and M.

    I guess which one is correct?? Not after an answer, that's why I have left out some of the figures, but looking for a solution to which variable to use. Is it RV or M??

    Thanks
    Macca
  • Sep 17, 2009, 12:26 PM
    monkey50000
    The two equations are actually correct one is Cost of debt before tax and the second is after-tax cost of debt. It depends on what you are looking for. Most equations use the later of the two which is the after-tax cost of debt.
  • Jun 21, 2012, 08:23 AM
    reyan145
    Can anyone tell me in which book that cost of debt formula is stated.. so I can show it to my faculty...

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