Pre-Tax Cost of Debt Calc
What is the most appropriate/conventional way to calculate pre-tax cost of debt to be used in a WACC calculation?
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((Annual Interest Expense / Total Debt) * 100) * (1-Tax Rate)
https://www.fool.com/knowledge-center/what-is-cost-of-debt.aspx
(1-marginal tax rate)*(rf+default spread)
can look up default spread based on credit ratings on Moody’s or snp
Does the (Rf+Default Spread) arrive you to the YTM of debt to be used for pre-tax cost of debt? I understand multiplying by 1-Tax Rate to arrive to after-tax cost of debt. I'm asking about how to find/calculate the company's pre-tax cost of debt
Thanks for the responses. So I've seen pre-tax cost of debt calculated 2 ways: 1) using interest expense/total debt to arrive at an imputed average interest rate (avg % int expense to total debt for x amount of years) and 2) taking the YTM of debt. Which method is more appropriate to use/is used more often in banking/valuation and if it is YTM of debt, how would you determine/find the YTM?
From my limited experience, I have used YTM. If a company has publicly traded debt, you could use the last day's traded YTM on a bond with a maturity that closely matches your projection period. You could also find the weighted average YTM on all of the company's debt, but this would take quite some time and from what I've come across seems more like an academic exercise. I think the main point of using YTM over imputed interest is the fact that YTM will tell you the true cost of issuing debt at this given moment.
And as mention in previous comments above, don't forget to multiply the YTM by (1-tax rate)
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