Which debt rates to used when calculate WACC

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jvx1975

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People can someone tell me which before tax cost of debt i have to use to calculate Wacc if i have multiple bonds outstanding. I think i have to use the YTM of the last bond the company issue, its is correct ?
Thank you
 
S2000magician wrote:
That’s what I’d use.
Click to expand...
Im not sure if it’s something different from the CFAI curriculum, but I was under the impression you could (as another method) take a weighted average of the YTMs on outstanding debt to estimate the cost of debt for a company. What are your experiences/thoughts with this?
 
tickersu wrote:
S2000magician wrote:That’s what I’d use.
Click to expand...
Im not sure if it’s something different from the CFAI curriculum, but I was under the impression you could (as another method) take a weighted average of the YTMs on outstanding debt to estimate the cost of debt for a company. What are your experiences/thoughts with this?
Click to expand...
That seems like a reasonable approach.
In fact, the curriculum doesn’t specify how to choose (or calculate) the pre-tax cost of debt.
 
S2000magician wrote:
tickersu wrote:
S2000magician wrote:That’s what I’d use.
Click to expand...
Im not sure if it’s something different from the CFAI curriculum, but I was under the impression you could (as another method) take a weighted average of the YTMs on outstanding debt to estimate the cost of debt for a company. What are your experiences/thoughts with this?
Click to expand...
That seems like a reasonable approach.
In fact, the curriculum doesn’t specify how to choose (or calculate) the pre-tax cost of debt.
Click to expand...
From the practice I can tell that the weighted average cost of all the the outstanding debt is what you see quite often as an approximation. (However you might argue that theoretically you schould take the marginal cost of debt.)
Best,
Oscar
 
Oscar and S2000:
I remember I was instructed to use the weighted average method in a case report I did in my MS Finance program, so I figured there was probably some validity to it as an estimation method for the cost of debt.
Thanks!
 
My pleasure.
Things are somewhat simplified for the CFA exams, of course; they haven’t time to calculate the weighted average of a bunch of YTMs to get the pre-tax cost of debt, and that isn’t the point of the LOS anyway.
Oscar: you’re correct: it’s the marginal cost of debt that we want.
 
I think the marginal cost of debt must be used, because that debt is the funding amount for the project you are valorizing. If you have multiple debts for the same project you would calculate the weighted cost of all debts involved which are marginal of your debt structure also.
 
In the real world, I’d agree with you.
On the exam, it won’t be nearly that difficult: they’ll give you the number to use.
 
Remember what I wrote above: the curriculum doesn’t specify how to choose or calculate it.
They have to give it to you.
 
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