cost of debt

Interest payments / current market value of interest bearing debt.

Cost of debt is directly observable and is much easier to find (compared to cost of equity).

You can find cost of debt by looking at the YTM of Long Term debt issued by the company that you are trying to value or a similar company in the industry.

Eric, I don't really think that "market value of IB debt" has anything to do with cost of debt.

Am I wrong?

I am taking a high level valuation course. So I am valuing a LBO target. It is highly levered with more than 20 different bonds and notes (varying maturities and very different YTM - perhaps due to different terms and conditions). In this case, how can I accurately calculate the cost of debt? From class, the professor has told us to use a zero coupon bond, which I cannot find for my company. Since Sponsors usually exit within 5 to 6 years, the cost of debt will likely to drop significant when they IPO. I am using a long bond as the rf, shouldn't I also match the cost of debt to 10 years? What do you guys think? Any experienced banker willing help out?

If the firm has bonds outstanding, and the bonds are traded, the yield to
maturity on a long-term, straight (no special features) bond can be used as the
interest rate.
 If the firm is rated, use the rating and a typical default spread on bonds with
that rating to estimate the cost of debt.
 If the firm is not rated,
• and it has recently borrowed long term from a bank, use the interest rate on the
borrowing or
• estimate a synthetic rating for the company, and use the synthetic rating to arrive at
a default spread and a cost of debt
 The cost of debt has to be estimated in the same currency as the cost of equity
and the cash flows in the valuation.
citation: damodaran.com

that should help you out.

haha..he is actually my professor. I am awaiting his reply to my question. Just want to know how industry guys calc it. The company I am valuing is CCU - Clear Channel, they do not have a straight bond. Does anyone know how to get the latest default spread from S&P or Moody?

I think that if there is more than one issue outstanding, you take the weighted average yield to maturity of all of the issues also.

Is a weighted average definitely the way to go?
And did Prof Damo himself get back on this one?
Cheers.