Cost of Debt (Example)
Guys, can someone help me out on this one? The cost of debt in this example is 6%. Is that probably just an approximation or how would I have to calc it? Weighing the loan and notes gives me 5.6% and without weighing 6.25%.
Is that an inappropriate way of calculating on my part or may the textbook result just be a typo.
You get to 6% exactly if you assume LIBOR is at the floor, 1% (it isn't since 3 month LIBOR is ~2.776%) AND the that the senior notes are floating as well (8%+1%), which they aren't - they're fixed. -((1000(3.5%+1.0%)+(500(8%+1%))/((1,500)=6%
Real world answer should be ~6.85% using LIBOR of 2.776% and fixed senior notes rate. -((1000(3.5%+2.776%)+(500(8%))/((1,500)=6.85%
Using the textbooks methodology of assuming LIBOR is at the floor should result in ~5.67%. -((1000(3.5%+1.0%)+(500(8%))/((1,500)=5.67%
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