 A Note on the Cost of Debt**Charles W. Haley Journal of Financial and Quantitative Analysis, 1966, vol. 1, issue 4, 72-93 Abstract: 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. Date: 1966 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:1:y:1966:i:04:p:72-93_01 Access Statistics for this article More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK. |
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