Cost of debt in a DCF model and target capital structure
Hello Monkeys,
Can anyone provide some insights on how to find the cost of debt for a firm and the target capital structure.
Cost of debt is the interest rate to borrow. However, a company may have all kinds of liabilities with different rates. How do you find the cost of debt?
Rosenhaum's guide states that usually the optimal capital structure is used. However, how do I determine the optimal capital structure?
Thanks in advance
For optimal capital structure, you could just use the industry WACC and cost of debt. You could compare this to the company's historical cost of debt, which you'd calculate using a weighted average of each type's interest rate, to see if it makes sense. WACC is usually between 8% and 12% for a given company.
Just to clarify on the above, you should be looking at YTM's for the cost of debt (also if it's illiquid, you might want to look at an average YTM for companies with the same credit rating).
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