Session 8: Cost of Debt & Capital

In this class, we started with the cost of debt, noting that it is not the cost of your existing borrowing (or a book interest rate), but the rate at which you can borrow money today. In effect, the cost of debt becomes an exercise in assessing credit risk and coming up with a default spread, one that may be simplified if your company has bonds outstanding or a bond rating, but more complicated, if not. We looked a synthetic ratings process for estimating the rating and spreads for the latter. Finally, we presented the argument for using market debt ratios in computing costs of capital and how to deal with hybrid securities.. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis: https://fred.stlouisfed.org These are spreads on indices created by rating, updated daily. Start of the class test: https://www.stern.nyu.edu/~adamodar/p... Slides: https://www.stern.nyu.edu/~adamodar/p... Post class test: https://www.stern.nyu.edu/~adamodar/p... Post class test solution: https://www.stern.nyu.edu/~adamodar/p...