Estimating The Cost Of Debt For WACC

Estimating The Cost Of Debt For WACC - DCF Model Insights

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Күн бұрын

In today’s video, we learn about calculating the cost of debt used in the weighted average cost of capital (WACC) calculation. This is part of the DCF insights series for more advanced students but it offers valuable insights about the assumptions used in the model. Like many other segments of the discounted cash flow (DCF) model, the cost of debt is very important. The four methods covered in the video are;
- Yield to maturity (YTM) approach
- Debt rating approach
- Synthetic Rating Approach
- Interest on Debt Approach
Link to the country default spread and risk premium database;
pages.stern.nyu.edu/~adamodar/...
Link to the bond profile for Apple Inc used in the video;
quicktake.morningstar.com/stoc...
Link to an amazing presentation summarizing the DCF Model by Aswath Damodaran;
people.stern.nyu.edu/adamodar/...
Please like and subscribe to my channel for more content every week. If you have any questions, please comment below.
For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories.
seekingalpha.com/author/robert...

Пікірлер: 35

@stivicanka2703 2 жыл бұрын

HANDS DOWN, NOBODY ON KZfaq EXPLAINS THE COST OF DEBT BETTER THAN THIS!

@fabzeellondon7633 6 жыл бұрын

THIS IS THE BEST EXPLANATION FOR COST OF DEBT

@financekid3163 6 жыл бұрын

Thank you!

@tatendamutedzi1753 Ай бұрын

You are amazing! The best explanation on the internet so far!

@FayesFood 4 жыл бұрын

Literally have been looking for the past few hours for an example presenting the YTM approach with multiple bonds. Thank you so much!

@FayesFood 4 жыл бұрын

How did you get the effective tax rate? My example states that the corporate tax rate is 21%, so can I use that to subtract from 1 or is that not right?

@RealitikDaily 2 жыл бұрын

Best video about cost of debt I found after hours of researches

@dhruvrehan 2 жыл бұрын

Thank you for explaining in a simple and effective manner

@Austerlitz2 4 жыл бұрын

Thank you very much for the insights and the excellent step by step approach. Question: where do you source your default spreads? I understand that the ratings are a function of the Interest Coverage Ratio but I wonder how the default spreads are implied from the bond market. thanks

@eveadam3951 5 жыл бұрын

this is very nice explanation thank you

@julianr6430 6 жыл бұрын

bro thank you so much

@theoavalente Жыл бұрын

buried all the doubts i had. TYSM!

@financekid3163 Жыл бұрын

Thanks for watching!

@wajidazeemfy 6 жыл бұрын

A question keeps teasing my thought process. To value a business we discount its operational cash flows using WACC and then backing out loan, leads us to a value that can be assigned to equity holders. We need to have market values of both equity and debt to work out the WACC and WACC is then used to estimate the VALUE of the Business (isn't there a circular reference?) Secondly while we determine WACC for a private business (a business that is not listed on any stock exchange) what value of equity should be taken? I understand that it really is a BAD ASSUMPTION to use book values of equity as we estimate WACC.

@nicatalishov1419 4 жыл бұрын

Let's say bank has bonds, short term and long term bank loans. When we estimate the market value of debt should we take into account all of them?

@luikangwei 4 жыл бұрын

Where (which platform) do you usually use to obtain data on country spread risk

@bernardoramirez5320 4 жыл бұрын

Where can I look for default spreads for the year 1999? I'm trying to estimate the cost of debt of DaimlerChrysler at the end of that year. Its credit rating was A1 (Moody's) and A+ (Standard & Poor's)

@gabrielalbuquerque6951 2 жыл бұрын

Great video! Why wouldnt you just take the YTM of the bond with the longest maturity and go with it as the pre tax kd?

@cynthiadavila3664 7 жыл бұрын

Helpful video, thank you! How do you calculate the cost of debt for a financial institution (e.g. bank)?

@wajidazeemfy 6 жыл бұрын

Should valuation procedure be any different from non-financial institution? Each business is expected to bear credit rating, or at least can be assigned a credit rating by following instructions explained as "Synthetic" debt rating in this video?

@JonesDawg 5 жыл бұрын

How do you get the market value of debt for the last three approaches? Thanks.

@drakespears2611 3 жыл бұрын

Thank you very much for this great video. I have one question please, How does the Yield to Maturity approach work if not all of the debt is traded? Like if the company has bonds but also has Bank debt (term loans with interest rates), how does that work?

@jehanraelnair3273 3 жыл бұрын

C[(1 - (1/((1 + Kd)^t)))/Kd] + [FV/((1 + Kd)^t)]

@shinyshine Жыл бұрын

i have the same question too. i guess the answer is to find use the weighted average (based on their MV) for public debts and bank debts.

@aakratisucklecha5596 5 жыл бұрын

Do we include finance lease as debt?

@utopia8177 3 ай бұрын

how the heck do you find that on Morningstar , and it be nice if you sue a 10k as an exmaple with them only giving us the total bond not price

@fatimakassama3223 4 жыл бұрын

Hello sir am confuse on how to calculate the cost debt with market value of equity, market value debt, tax rate, wacc, cost of equity

@dylosophical5016 3 жыл бұрын

Where can we find the figures from 7:52 ? how can we know they will remain accurate?

@neolaneunchae 3 жыл бұрын

is the face value = 100 mentioned at @4:45 the same as nominal?

@samuellane4437 4 жыл бұрын

I don't understand what is meant by 1- t. Say for instance the tax rate is 20% is that 1 - 0.2? It really makes no sense to me so my calculations always fail

@premiumleader8948 2 жыл бұрын

How do you find country spread?

@lessthanzero. 2 жыл бұрын

The easiest route is to find it in Aswath Damodaran's website (current data) where he computes everything for you. The other approach is listen to his lectures about it and compute them on your own. Website: pages.stern.nyu.edu/~adamodar/ Short lecture: kzfaq.info/get/bejne/ed56bMhnlt2uqYU.html

@premiumleader8948 2 жыл бұрын

E. Joseph ok thank you I have one more question how do you also find default spread?

@lessthanzero. 2 жыл бұрын

@@premiumleader8948 An easy way is to use the default spreads from the Country Default Spreads and Risk Premiums dataset in Aswath Damodaran's website (data -> current data) which is also the dataset where you will find country spread or country risk premiums. If you want to take a more active role in whatever you are doing, watch this lecture where he explains how to get the default spread in which he mentioned 3 ways. kzfaq.info/get/bejne/a55kpJWXmce4lJc.html

@premiumleader8948 2 жыл бұрын

E. Joseph thank you very much sir. 👍