Corporate Finance Spring 2025 - Session 10: Debt and the Cost of Debt

In the quiz -shortened session, we first defined debt broadly as including all contractual obligations, thus encompassing all interest bearing debt and leases. We then argued that the cost of deb tis a long term rate of borrowing money today, and is thus composed of a riskfree rate and a default spread. With rated companies, we can use the rating to get a spread, but for non-rated companies, you have to use the interest coverage ratio to get a synthetic rating, and then use that rating to get a default spread. With companies in risky countries, you should be adding the country default spreads to the riskfree rates to get to the cost of debt. Finally, we have to bring in the tax savings that accrue from being able to net interest expenses out to get to taxable income, by multiplying the cost of debt by (1- marginal tax rate). Slides: https://nyu.box.com/s/07kdb11ksh4sqeisws13yqsndflxi17g https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session10test.pdf Post class test solution: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session10soln.pdf