Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T13:57:59.309Z Has data issue: false hasContentIssue false
  • English
  • Français

A Note on the Cost of Debt**

Published online by Cambridge University Press:  19 October 2009

Charles W. Haley
Get access Rights & Permissions [Opens in a new window]

Extract

The continuing discussion on the cost of capital and related Issues has tended to focus on the capital market conditions, necessary to guarantee the validity of particular conclusions Works by F Modlgllani and M. H. Miller [4, 5, 6] and J Lintner [2], for example, are developed in this manner. The following discussion is developed from the standpoint of a firm borrowing funds in an uncertain world. An example expressed in terms of an individual borrower begins the analysis. The aim is to suggest a different approach to the capitalization and costing of contractual obligations (debt) than those current in both the theoretical and applied literature. A model is developed which expresses the cost of debt to the borrower as a function of both the expected rate and the promised rate of the debt contract. Using this analytic structure, the relationship between the two rates and the Implications of using either one as the cost of debt to the firm are explored. An hypothesis as to the behavior of the borrower (management and shareholders) provides a third expression for the cost of debt which is suggested to be superior to either alternative.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 1 , Issue 4 , December 1966 , pp. 72 - 93
Copyright
Copyright © School of Business Administration, University of Washington 1966

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

1.Boness, A. J., “A Pedegogic Note of the Cost of Capital,” journal of Finance, XIX, no. 1 (1964), pp. 99–106.CrossRefGoogle Scholar
2.Lintner, John, “Dividends, Earnings, Leverage, Stock Prices and the Supply of Capital to Corporations,” Review of Economics and Statistics, XLIV, no. 3 (1962), pp. 243–269.CrossRefGoogle Scholar
3.Guthman, H. G. and Dougall, H. E., Corporate Financial Policy, Englewood Cliffs, N. J.: Prentice-Hall, 1962.Google Scholar
4.Modigliani, F. and Miller, M. H., “The Cost of Capital, Corporation Finance, and the Theory of Investment,” pp. 261–297. American Economic Review, XLVIII, no. 3 (1958).Google Scholar
5.Modigliani, F. and Miller, M. H., “The Cost of Capital, Corporation Finance, and the Theory of Investment: Reply,” American Economic Review, XLIX, no. 4 (1959), pp. 655–669.Google Scholar
6.Modigliani, F. and Miller, M. H., “Corporate Income Taxes and the Cost of Capital: A Correction,” American Economic Review, LIII, no. 3 (1963), pp. 433–442.Google Scholar
7.Solomon, Ezra, “Measuring a Company's Cost of Capital” in Solomon, E., ed., The Management of Corporate Capital, New York: The Free Press of Glencoe, 1959.Google Scholar
8.Solomon, Ezra, The Theory of Financial Management, New York: Columbia University Press, 1963.Google Scholar
9.Robichek, A. A. and Myers, S. C., Optimal Financing Decisions, Englewood Cliffs, N.J.: Prentice-Hall, 1965.Google Scholar
10.Robichek, A. A. and Myers, S. C., “Problems in the Theory of Optimal Capital Structure,” Journal of Financial and Quantitative Analysis, I, no. 2 (June, 1966), pp. 1–35.CrossRefGoogle Scholar
11.Van Home, James, “A Linear—Programming Approach to Evaluating Restrictions under a Bond Indenture or Loan Agreement,” Journal of Financial and Quantitative Analysis, I, no. 2 (June, 1966) pp. 68–83.Google Scholar