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May i know how do you calculate linear interpolation method for Cost of Debt,Rd ?? given details systematic risk of TLC Ltd’s equity 0.80 , risk free rate 10%, expected rate of return 15%, interest rate on debt 11% paid annually, due in eight years time , market price $111 , tax rate 30% and source of funds and market value debt(par value$100) 1 , equity 3
The systematic risk of the equity and the level of gearing are not relevant for calculating the cost of debt.
For the cost of debt you need to calculate the IRR of the after-tax cash flows. (All IRR’s involve linear interpolation)
If you watch my free lecture on here on the cost of debt, you will see examples of how this is done.
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