When calculating the cost of debt, the chief financial officer is likely to face many challenges and difficulties. The time difference between the time of acquisition of the debt and the current may affect his calculation procedure . Usually, calculation of cost of debt bases on the current market rate that the company is paying on its debt. In an instance where the company is not paying the market rate, there should be determination of an appropriate market arte payable by the company.
Essentially, the chief financial officer may find difficulties estimating this market rte as he or she is supposed to make a consolidation of rates since the beginning of the fiscal year, this presents the CFO with challenges. Current market rates are subject to frequent changes and this has the implication that it will be involving for the chief financial officer to make adjustments every other time that the market arte changes . Due to frequent changes, it is possible that the chief financial officer will arrive at a figure, which is subject to change at the time he completes his calculation.
At times the cost of debt may be required when the tax cost is not determined this has the implication that the chief financial officer will be forced to stop his calculation as he waits for determination of the tax amount payable . The industry in which a business operates may be complex so that it is difficult to determine the exact market rate. This will present difficulties in that calculating the cost of debt may be hindered due to existence of inconsistent market rates, which affect the work of the chief financial officer . Overstated or understated figures in the financial information prevent arriving at a correct figure that is reliable.
Bibliography
Andrew, H. (2010). Financial Strategy: Students Tend to Find Discussing Debt Finance Far Easier Than Doing the Calculations. Andrew Howarth Explains How to Deal with Yield on Debt. Financial Management (UK) , pp 5-32.
Hun, H. S. (2012). Rating Agency Reputation, the Global Financial Crisis, and the Cost of Debt. Financial Management, 41(4) , pp 3-29.
Keith, H. R. (2010). Calculating Debt Service When Payment Frequencies Differ. Government Finance Review, 26(1) , pp 3-25.
Richard, H. J. (1997). The Market Value of Debt, Market versus Book Value of Debt, and Returns of Assets. Financial Management, 26(1) , pp 3-31.
