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    Cost of Debt

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    Cost of Debt

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    3 views26 pages

    Cost of Debt

    Uploaded by

    pgp24.ravikumar

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    WACC

    Divisional WACC: Computation

    • Beta of the division is calculated by using the beta of publicly traded


    firms having characteristics as the division under consideration.
    • This beta is than used to calculate division’s cost of equity and WACC
    The Pure Play Method : Key
    decision points
    Based on levered-unlevered beta

    Equity or levered beta:


    • It is the beta of a listed firm
    • It includes both business risk and the risk that comes from debt
    • It is calculated as:
    The Pure Play Method : Key
    decision points
    Asset or unlevered beta:

    • reflects the risk of firm’s assets without the impact of debt


    • assumes its assets are financed only through equity
    • It is calculated as:
    Introduction to Bonds
    • Bonds and Bond Valuation.
    • More about Bond Features.
    • Bond Ratings.
    • Rates & Bonds - Bloomberg
    • RELIANCE.NS WACC | Reliance Industries Ltd (RELIANCE.NS)
    Bond features and prices
    When a corporation or government wishes to borrow money from the public on a long-term basis, it
    usually does so by issuing or selling debt securities that are generically called bonds.
    • Normally interest-only loans.
    Suppose the Beck Corporation wants to borrow $1,000 for 30 years. The interest rate on similar debt
    issued by similar corporations is 12%. Beck will thus pay .12 × $1,000 = $120 in interest every year
    for 30 years. At the end of 30 years, Beck will repay the $1,000.
    • Coupon is the stated interest payment made on a bond (That is, $120).
    • Face value, or par value, is the principal amount of a bond that is repair at the end of the term
    (That is, $1,000).
    • Coupon rate is the annual coupon divided by the face value of the bond (That is, $120/$1,000
    = .12, or 12%).
    • Maturity is the specified date on which the principal amount of a bond is paid (That is, 30 years).
    Bond values and yields
    Over time, interest rates change in the marketplace, but the cash flows from a
    bond remain the same; as a result, the value of the bond will fluctuate.
    • When interest rates rise, the present value of the bond’s remaining cash flows
    declines, and the bond is worth less.
    • When interest rates fall, the bond is worth more.
    To find the value of a bond at a particular point in time, we need the following
    pieces of information:
    • Number of periods remaining until maturity.
    • Face value.
    • Coupon.
    • Yield to maturity (YTM), or yield, which is the rate required in the market on a
    bond.
    Bond values and yields:
    an example (par value bond)
    Suppose Xanth Co. were to issue a bond with 10 years to maturity. The
    Xanth bond has an annual coupon of $80. Similar bonds have a yield to
    maturity of 8 percent. What would this bond sell for?
    • Bond will pay $80 per year for the next 10 years in coupon interest. In
    10 years, Xanth will pay $1,000 to the bond owner.
    Cashflows for Xanth bond
    Discount bond
    Premium bond
    General expression for value of a bond
    Interest rate risk and time to
    maturity
    Some discussions
    • SKM Industries issues Rs 100, 10 year bond on 5 December 2020 with
    annual coupon rate of 12.5% with coupons paid annually. The market
    value of bond is Rs 97.5, find cost of debt? Tax rate=30%.
    • SKM Industries issues Rs 100, 10 year bond on 5 December 2020 with
    annual coupon rate of 12.5% with coupons paid annually. Floatation
    cost is 1% The market value of bond is Rs 97.5, find cost of debt? Tax
    rate=30%.

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