How would you find an appropriate YTM for a company like MSFT? Say you are doing a DCF that projects out 5 years. Does this mean that you should use a YTM from a Note/Bond due in 2025 (due in 5 years)? Is there a more appropriate way to find YTM or Pre-tax cost of debt for WACC?
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if you’re thinking about pre tax cost of debt - you want to use long term cost of debt funding. so take a 20yr+ duration MSFT bond and use that as your cost of debt
Could you explain the thinking behind taking a bond with a 20 yr duration? Is that just so I'm choosing a bond that is long term?
DCF doesn't end at 5 yrs, that's just the explicit forecast period (some people do 7-10 years even). WACC assumes constant capital structure into perpetuity. Put another way, when you're valuing the 2nd "stage" of the dcf, you're still using the same discount rate. So for sure it doesn't make sense to use a bond w maturity of 5 yrs. I think person above is suggesting 20 yr bcuz it's more representative of long term financing
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