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Why do analysts care about the current cost of long-term debt when estimating a firm's cost of...

Question:

Why do analysts care about the current cost of long-term debt when estimating a firm's cost of capital?

Long-term debt:

The outstanding debt that an organization holds and has a maturity period of 12 months or more is known as long-term debt. In any organization?s balance sheet, it is shown as a type of liability that is non-current.

Answer and Explanation:

The current cost of long term debt is the cost associated with the principal amount that will be returned when the repayment is scheduled. Cost of capital is described as the amount paid in return of capital that is continued to be invested in the business in the said financial year. The weighted average cost of equity and debt is included in the cost of capital. Any firm?s weighted average cost of capital shows the proportion of capital financed from all the sources; that is, preferred and common shares and debt. In any long term debt, a certain part of the principal amount is paid back to the financial institutions, which eventually should be lower than the cost of capital. That is why, the managers are concerned about the present cost of any long-term debt.


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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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