Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: Reginald Middleton who wrote (181)	4/21/1998 4:24:00 PM
From: porcupine --''''>	Read Replies (1) of 1722

<< The cost of capital for debt is arrived at by taking the current rate and subtracting the benefit of any tax shields that may apply. This converts the rate into an actual risk adjusted cash cost for the company in question. >> I take it that the "current rate" is the interest the company in question is paying on its debt, as opposed to, say, some average for the Market. My question is whether it would be more consistent to measure the corresponding cost of equity by its "current rate", i.e., its earnings yield (earnings/price)? This is the price shareholders would pay (in terms of eps dilution) if the firm financed purchased equipment by the issuance of more common stock. Alternatively, to change the measurement of debt to make it consistent with the measurement of equity, wouldn't the cost of debt be calculated by taking the 200-year average cost of risk-free debt, and adjusting it for the historic creditworthiness of the industry in question?

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