Due Diligence - How to Investigate a Stock Message Board

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Strategies & Market Trends : Due Diligence - How to Investigate a Stock

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To: broken_cookie who wrote (492)	5/26/1999 9:40:00 AM
From: Henry Volquardsen	Read Replies (1) of 752

Richard, not an ignorant question as the analysis works from either side. My preference would depend on perspective. If you are an investor trying to evaluate multiple securities then the best neutral rate for analysis will probably be the current risk free rate of return. But in this case John's analysis was from the perspective of the company making a decision on recalling the debt. At that point the risk free rate of return has no direct impact. The direct impact will be their cost of borrowing. Also since discount rates are convex, using the exact borrowing rate will give them a more precise cost savings number. And finally, it would simplify the analysis. Since the net present value of a bond discounted at the coupon rate is definitionally par there is no need to do any calculation on that side. You only have to calculate the present value of the off market coupon. But again, it is not 'wrong' to use the current risk free rate of return. But, imo, from the company's perspective it is more precise to use replacement borrowing cost. Henry

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