|Cost of Debt
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Definition of Cost of Debt
Cost of Debt
The cost of debt (bonds, loans, etc.) that a company is charged for
The firm's cost of debt capital.
Refers to the interest cost of debt capital used by a business
Schedule of depreciation rates allowed for tax purposes.
The argument that specifies that the various agency costs create a complex environment in
The incremental costs of having an agent make decisions for a principal.
Total costs, explicit and implicit.
A firm's required payout to the bondholders and to the stockholders expressed as a
The argument that expected indirect and direct bankruptcy costs offset the other
costs that increase with increases in the level of investment in current assets.
Arrangement whereby the shareholders of a project receive output free of
The required return for a capital budgeting project.
Related: Net financing cost
Interest rate associated with borrowing money.
A lease's internal rate of return.
The discount rate that equates the after-tax inflows with outflows for capital
The net present value of an investment divided by the investment's initial cost. Also called
Indicator of financial leverage. Compares assets provided by creditors to assets provided
Ability to borrow. The amount a firm can borrow up to the point where the firm value no
The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
An asset requiring fixed dollar payments, such as a government or corporate bond.
The amplification of the return earned on equity when an investment or firm is financed
A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.
The market for trading debt instruments.
Total debt divided by total assets.
Reducing the principal and/or interest payments on LDC loans.
IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
Interest payment plus repayments of principal to creditors, that is, retirement of debt.
Debt service parity approach
An analysis wherein the alternatives under consideration will provide the firm
Debt-service coverage ratio
Earnings before interest and income taxes plus one-third rental charges, divided
A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
Debtor in possession
A firm that is continuing to operate under Chapter 11 bankruptcy process.
New debt obtained by a firm during the Chapter 11 bankruptcy process.
Equivalent annual cost
The equivalent cost per year of owning an asset over its entire life.
The difference between the execution price of a security and the price that would have
Financial distress costs
Legal and administrative costs of liquidation or reorganization. Also includes
Firm's net value of debt
Total firm value minus total firm debt.
A cost that is fixed in total for a given period of time and for given production levels.
costs, both implied and direct, associated with a transaction. Such costs include time, effort,
debt maturing after more than one year.
Incremental costs and benefits
costs and benefits that would occur if a particular course of action were
Transaction costs that include the assessment of the investment merits of a financial asset.
Junior debt (subordinate debt)
debt whose holders have a claim on the firm's assets only after senior
An obligation having a maturity of more than one year from the date it was issued. Also
Indicator of financial leverage. Shows long-term debt as a proportion of the
Long-term debt ratio
The ratio of long-term debt to total capitalization.
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
Market impact costs
Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.
Market timing costs
costs that arise from price movement of the stock during the time of the transaction
Net financing cost
Also called the cost of carry or, simply, carry, the difference between the cost of financing
Opportunity cost of capital
Expected return that is foregone by investing in a project rather than in
The difference in the performance of an actual investment and a desired investment
Original issue discount debt (OID debt)
debt that is initially offered at a price below par.
Price impact costs
Related: market impact costs
cost to replace a firm's assets.
Round-trip transactions costs
costs of completing a transaction, including commissions, market impact
costs associated with locating a counterparty to a trade, including explicit costs (such as
debt that, in the event of default, has first claim on specified assets.
debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
costs that fall with increases in the level of investment in current assets.
debt that has been customized for the buyer, often by incorporating unusual options.
debt over which senior debt takes priority. In the event of bankruptcy, subordinated
costs that have been incurred and cannot be reversed.
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
costs of buying and selling marketable securities and borrowing. Trading costs include
The time, effort, and money necessary, including such things as commission fees and the
True interest cost
For a security such as commercial paper that is sold on a discount basis, the coupon rate
debt maturing within one year (short-term debt). See: funded debt.
debt that does not identify specific assets that can be taken over by the debtholder in case of default.
A cost that is directly proportional to the volume of output produced. When production is zero,
Weighted average cost of capital
Expected return on a portfolio of all the firm's securities. Used as a hurdle
An assetâ€™s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.
Cost of goods sold
The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
MACRS (Modified Accelerated Cost Recovery System)
A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).
RATIO OF DEBT TO STOCKHOLDERSâ€™ EQUITY
A ratio that shows which groupâ€”creditors or stockholdersâ€”has the biggest stake in or the most control of a company:
A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.
A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.
costs that are identifiable with and able to be influenced by decisions made at the business
The amount of cash expended.
A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
The idea that fixed costs and variable costs react differently to changes in the volume of
A division or unit of an organization that is responsible for controlling costs.
The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.
The most significant cause of the cost of an activity, a measure of the demand for an activity
Anything for which a measurement of cost is required â€“ inputs, processes, outputs or responsibility centres.
Cost of capital
The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
Cost of goods sold
See cost of sales.
Cost of manufacture
The cost of goods manufactured for subsequent sale.
Cost of quality
The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.
Cost of sales
The manufacture or purchase price of goods sold in a period or the cost of providing a service.
A method of pricing in which a mark-up is added to the total product/service cost.
The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.
Costâ€“volumeâ€“profit analysis (CVP)
A method for understanding the relationship between revenue, cost and sales volume.
Borrowings from financiers.
Sales to customers who have bought goods or services on credit but who have not yet paid their debt.
costs that are readily traceable to particular products or services.
costs that do not change with increases or decreases in the volume of goods or services
The cost of a product/service that includes an allocation of all the (production and
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