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arushi_13
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| Posted: 29 Jan 2009 at 18:49 | IP Logged
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If market interest rates increase, then a Co.'s bonds would have to be offered at a discount to stay competitive with the market. This discount would increase Co's cost of debt.
Can someone please explain why?
Thanks a lot.
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cpayesican
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| Posted: 29 Jan 2009 at 18:56 | IP Logged
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one of the cost of debt formula is
Interest DIVIDED BY net proceeds
so lets assume the cost of debt prior to the bonds offered at a discount is 16/100 or 16%(pre tax)
when the bond has to be offered at a discount, lets assume the denominator is 96(to account for the discount), then the cost of debt is 16.67%
Hope that helps!
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arushi_13
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| Posted: 29 Jan 2009 at 20:21 | IP Logged
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Hey,
Really appreciate it:) Yes it surely helps...
Edited by arushi_13 on 29 Jan 2009 at 20:50
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arushi_13
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| Posted: 29 Jan 2009 at 20:51 | IP Logged
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hey can you please tell me the exact formula...sorry cannot find it for debt.I did find it for Preferred Stock.
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Topic: Cost of debt
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