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A Note on the Cost of Debt*

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  • Haley, Charles W.

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.

Suggested Citation

  • Haley, Charles W., 1966. "A Note on the Cost of Debt*," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 1(4), pages 72-93, December.
    • Handle: RePEc:cup:jfinqa:v:1:y:1966:i:04:p:72-93_01
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    Cited by:

    1. Jean Lange, 1970. "Essai sur l'efficacité de la politique monétaire," Revue Économique, Programme National Persée, vol. 21(6), pages 973-1005.

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