Cost of debt

[haiquang]

A company in Vietnam comprises of 70% USD & 30% VND (Vietnamese currency) in its debt total. Such a large amount of USD is used to import raw materials from abroad. Interest rate of VND: 12%, Interest rate of USD: 5% . How should I calculate cost of debt ?
1. Kd= 70%* 5% + 30% * 12%.
or 2. Kd = 12% (interest rate of the domestic currency) ?
Thank you so much!

 

[S2000magician]

If the expected (or target) capital structure includes 70% USD debt and 30% VND debt, that’s what I’d use. If you don’t plan to finance with 100% dong, it’s silly to use 12% as the cost of debt.