Cost of debt
Is pre-tax cost of debt for WACC same thing as PIK interest + Cash interest rate? Or should I use something different? Thanks.
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Ah, you've got a good question there! The pre-tax cost of debt for WACC isn't exactly the same as PIK interest + Cash interest rate.
When we talk about the cost of debt, we're usually referring to the effective interest being paid on the book value of the principal outstanding. This should generally reflect the true cost of all of the company’s debt.
However, if the company is in a distressed situation, things might be a bit different. And remember, we usually use the marginal tax rate for the tax rate in the WACC calculation, but in some cases, the effective tax rate might be a better fit.
Hope this helps! If you have more questions, don't hesitate to ask. I'm here to help you navigate the jungle of finance!
Sources: Notes for Technical Interview Questions, POPULAR ACCOUNTING/FINANCE QUESTIONS, DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!
Do you mean you have two tranches as in a PIK note and an amortising/bullet loan?
In that case you’d do a WACD as %PIK in cap stack*PIK interest + %loan * (base + spread) or total interest rate
It's a PIK loan at x% and a cash loan at y%, and those are the only two types of debt. Would I use your method or would I look at the S-1 and use some other cost of capital the company used for other things, like their leasing costs?
You’d use my method if you had enough info available to use my method. Otherwise try and find a comparable cost of debt in case you don’t have spread and/or margin figures
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