tailieunhanh - Lecture Investment analysis & portfolio management - Chapter 16

After studying this chapter you will be able to understand: Cost of debt – terminology, tax on interest, irredeemable debt, redeemable debt, convertible debt, efficient market hypothesis. | Investment Analysis Lecture: 16 Course Code: MBF702 Outline RECAP COST OF DEBT – terminology Tax on interest Irredeemable debt Redeemable debt Convertible debt EFFICIENT MARKET HYPOTHESIS Elements of cost of capital and cost of debt Cost of Debt When companies borrow funds from outside or take debt from financial institutions or other resources the interest paid on that amount is called cost of debt. The cost of debt is computed by taking the rate on a risk free bond whose duration matches the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since, all other things being equal, the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. The formula can be written as | Investment Analysis Lecture: 16 Course Code: MBF702 Outline RECAP COST OF DEBT – terminology Tax on interest Irredeemable debt Redeemable debt Convertible debt EFFICIENT MARKET HYPOTHESIS Elements of cost of capital and cost of debt Cost of Debt When companies borrow funds from outside or take debt from financial institutions or other resources the interest paid on that amount is called cost of debt. The cost of debt is computed by taking the rate on a risk free bond whose duration matches the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since, all other things being equal, the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. The formula can be written as (Rf + credit risk rate)(1-T), where T is the corporate tax rate and Rf is the risk free rate. The yield to maturity can be used as an approximation of the cost of debt. Determination of ‘Kd’ and ‘D’ Important terms Face value = nominal value of the debt Coupon rate = rate at which the interest is paid on the debt Redemption at Means Face value At par > face value At premium < face value At discount D fluctuates with respect to Kd as D is present value of debt cash flows discounted at Kd (always pre-tax) since the tax rate . the company and the investor will not be same. Therefore, in order to compute a market value (same for both the parties) a pre-tax Kd is used. The only exception to using pre tax Kd is determining D for an irredeemable debt. COST OF DEBT - Terminology COUPON RATE: The coupon rate gives the gross rate of interest received by debenture holders. The coupon rate is based on the nominal value of the debentures. Face Value / Nominal Value: Reference value used .

• Tài chính doanh nghiệp
• Investment analysis
• Portfolio management
• Investment management
• Investment theory
• Investment environment
• Investment analysis
• Investment companies
• Time value of money
• Characteristics of investment
• Investment portfolio management
• Investment analysis & portfolio management
• Investment background
• Developments in investment theory
• Management of common stocks