Issues in Estimating Cost of Debt
We discussed that the cost of debt for a company can be measured using the YTM or Debt-Rating approach.
An analyst faces certain issues while estimating the cost of debt. These issues are discussed below:
Floating/Fixed Rate Debt: In our previous article, our calculations assumed a fixed rate for debt. However, in reality, a firm may also issue floating rate debt. For such debt, the rate will be linked to a benchmark such as LIBOR, and will fluctuate periodically. This makes it difficult to estimate the cost of debt. The analyst may use the term structure while estimating the cost of debt.
This content is free but requires you to be logged in to access.
Create a free account to access this tutorial and all other free tutorials, courses, and resources.