Question

You want to estimate the cost of debt for a US based corporation. Unfortunately, this firm has no publicly traded debt neither does it have any debt that is rated by any of the major rating agencies. However, you have access to the firm’s financial statements. Outline how you would go about estimating the cost of debt for this firm. For full credit, outline and explain every step you would take.

Answer 1

Step1) Take out last 2 years balance sheet of the firm

Step2) On the liability & equity side: sum the value of long term liabilities & current liabilities**

**Refer to notes to account details for both long term liabilities & current liabilities. From those notes you will come to know the value of long term debt & short term debt the company has.

Step3) To calculate the total debt the company has, sum long term debt & short term debt for last 2 years and take the average value

Step4) Refer to indirect cash flow statement, and under financing activities, check the total interest paid by the firm.

Step5) Divide the interest paid/total debt (step3) & convert into percentage

Step6) This will give you the interest cost the company pays on its debt on average.