Cost of Debt?!?!
So based on bloomberg, an X company has:
Pre tax Cost of Debt: 3.63%
Effective Tax Rate: 21%
Cost of Debt: 3.53%
When i calculate 3.63%*(1-Tax Rate) i get 2.86%. Then i realized Bloomberg uses an input, "Debt Adjustment Factor" of 1.24, which when i multiply it with 2.86% i get the same Cost of Debt (3.53%).
Long story short, what the heck is a debt adjustment factor and why do we multiply it with the after tax cost of debt??????
BBG does this when the fair market curve isn’t available for the security. Non-FMC securities use an approximate pre-tax CoD and apply an adjustment factor to account for the spread to treasuries.
I don’t work for them though. If it’s unclear just reach out to them and ask.
Do you know if this is a standard (using the adjustment) in IDB or is it just specific to Bloomberg?
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