Market value of cost of debt for interview question
Hi guys,
If a company's debt is not trading at par, would you use current yield or the coupon rate for your cost of debt calculation?
My thought would be to use the coupon rate, because the cost of debt is from the company's perspective, and for them they are still paying the same interest as before. However, a counter-argument I can think to this is that it does not take into account company risk, since by the debt not trading at par the company is probably risky in some way, and you should use the current yield so that your WACC is higher to reflect that.
Any thoughts?
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