{"id":1210,"date":"2025-07-19T14:44:22","date_gmt":"2025-07-19T10:44:22","guid":{"rendered":"https:\/\/eoninvestment.com\/?p=1210"},"modified":"2026-04-11T21:24:14","modified_gmt":"2026-04-11T17:24:14","slug":"cost-of-debt-debt-%ce%b2","status":"publish","type":"post","link":"https:\/\/eoninvestment.com\/ka\/2025\/07\/19\/cost-of-debt-debt-%ce%b2\/","title":{"rendered":"<span class=\"eon-recovered-georgian-title\" data-no-translation=\"\">\u10e1\u10d4\u10e1\u10ee\u10d8 \u10e6\u10d8\u10e0\u10d4\u10d1\u10e3\u10da\u10d4\u10d1\u10d0 \u10d3\u10d0 \u03b2<\/span>"},"content":{"rendered":"\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83d\udcac How to Estimate Cost of Debt for Private Companies?<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">For \u201clisted\u201d companies, the <strong>Cost of Debt (CoD)<\/strong> is more or less accessible. But how do we estimate this number when valuing a <strong>private company<\/strong>?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Let\u2019s say a company has a loan at <strong>8%<\/strong> \u2014 can we just say its CoD is 8%?<br \/>Or imagine the company has issued bonds, and on the secondary market, those bonds trade at a price that implies a <strong>promised return (YTM) of 40%<\/strong>. Does that mean the CoD is 40%?<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Of course not.<\/strong><br \/>If a bond\u2019s price is so low that it promises an extremely high return, it means the <strong>default risk is very high<\/strong>.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83d\udd0d Example:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Suppose the market price of a bond falls such that its <strong>Yield to Maturity (YTM)<\/strong> reaches 40%. Meanwhile, the company\u2019s <strong>cost of equity<\/strong> is 12%. In this case, the <strong>expected default loss<\/strong> must be <strong>at least 28%<\/strong>, because it\u2019s impossible for the cost of debt to be <strong>higher than<\/strong> the cost of equity under rational expectations.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83d\udcc9 The logic:<\/h3>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>Expected Default Loss (EDL)<\/strong> = Difference between <strong>promised return (YTM)<\/strong> and the <strong>true economic cost of debt (CoD)<\/strong>.<\/p>\n<\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">While YTM is the discount rate that equates the <strong>promised cash flows<\/strong> to the bond price, the <strong>Cost of Debt<\/strong> is the discount rate that equates the <strong>expected cash flows<\/strong> (adjusted for default probability and recovery) to the bond price.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83e\uddee A Theoretical Formula:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">There\u2019s a formula that helps estimate the cost of debt more rigorously: SRP=(1\u2212EDL%)\u00d7Yield\u00a0Spread\\text{SRP} = (1 &#8211; \\text{EDL\\%}) \\times \\text{Yield Spread}<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>SRP<\/strong> = Systematic Risk Premium<\/li>\n\n\n\n<li><strong>EDL%<\/strong> = Expected Default Loss %<br \/><em>(Based on empirical studies \u2014 e.g., Elton et al., 2001 \u2014 which estimate loss ratios by credit rating)<\/em><\/li>\n\n\n\n<li><strong>Yield Spread<\/strong> = Difference between the corporate bond YTM and a risk-free bond of the same maturity<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\">Example:<\/h4>\n\n\n\n<p class=\"wp-block-paragraph\">If a company has an 8% loan, the risk-free rate is 4%, and <strong>EDL = 2.4%<\/strong>, then: SRP=4%\u00d7(1\u22120.024)=3.9%\\text{SRP} = 4\\% \\times (1 &#8211; 0.024) = 3.9\\% CoD=4%+3.9%=7.9%\\text{CoD} = 4\\% + 3.9\\% = 7.9\\%<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83d\udd04 Alternative Method: <strong>CAPM for Debt<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Due to the limited availability of reliable EDL statistics, it&#8217;s often more practical to use a <strong>modified CAPM approach<\/strong> to estimate Cost of Debt:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Estimate Debt Beta<\/strong> based on the credit rating<br \/>(Ratings are available from agencies like Moody\u2019s, S&#038;P, Fitch\u2026)<\/li>\n\n\n\n<li><strong>Replace the Risk-Free Rate<\/strong> with the YTM on <strong>AA-rated bonds<\/strong>, since these are considered to have negligible default risk.<\/li>\n\n\n\n<li><strong>Use Incremental Beta<\/strong>, i.e., the difference between the target debt rating\u2019s beta and the AA bond beta.<\/li>\n\n\n\n<li><strong>Market Risk Premium (MRP)<\/strong> should be aligned with the equity market used to estimate beta (usually based on S&#038;P 500 data).<\/li>\n<\/ol>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\u2705 Summary Formula:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Cost\u00a0of\u00a0Debt=YTM\u00a0[AA]+(Incremental\u00a0\u03b2\u00d7MRP)<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83c\udf0d In Georgia\u2019s context:<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">You\u2019ll also need to <strong>incorporate both country risk<\/strong> and <strong>currency risk (for GEL)<\/strong> to get a realistic estimate.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h3 class=\"wp-block-heading\">\ud83d\udcca Reference Table: <strong>Estimated Debt Betas by Rating<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><th>Credit Rating<\/th><th>Estimated Debt Beta<\/th><\/tr><\/thead><tbody><tr><td>\ud83d\udfe2 AAA<\/td><td>0.00 \u2013 0.05<\/td><\/tr><tr><td>\ud83d\udfe2 AA<\/td><td>0.05 \u2013 0.10<\/td><\/tr><tr><td>\ud83d\udfe2 A<\/td><td>0.10 \u2013 0.15<\/td><\/tr><tr><td>\ud83d\udfe1 BBB<\/td><td>0.15 \u2013 0.25<\/td><\/tr><tr><td>\ud83d\udfe0 BB<\/td><td>0.25 \u2013 0.40<\/td><\/tr><tr><td>\ud83d\udd34 B<\/td><td>0.40 \u2013 0.60<\/td><\/tr><tr><td>\ud83d\udd34 CCC<\/td><td>0.60 \u2013 0.80<\/td><\/tr><tr><td>\u26ab D (Default)<\/td><td>Approaches 1.00<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\">\ud83d\udcda <strong>Table Source:<\/strong> ChatGPT<br \/>\ud83d\udcd8 <strong>Content Source:<\/strong><br \/><em>Corporate Valuation: Theory, Evidence and Practice<\/em><br \/>by Mark E. Zmijewski &#038; Robert W. Holthausen (2nd Edition)<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;\u10d3\u10d0\u10da\u10d8\u10e1\u10e2\u10e3\u10da\u10d8&#8221; \u10d9\u10dd\u10db\u10de\u10d0\u10dc\u10d8\u10d4\u10d1\u10d8\u10e1 Cost of Debt \u10d0\u10e1\u10d4 \u10d7\u10e3 \u10d8\u10e1\u10d4 \u10ee\u10d4\u10da\u10db\u10d8\u10e1\u10d0\u10ec\u10d5\u10d3\u10dd\u10db\u10d8\u10d0, \u10db\u10d0\u10d2\u10e0\u10d0\u10db \u10e0\u10dd\u10d2\u10dd\u10e0 \u10d2\u10d0\u10d5\u10d8\u10d3\u10d4\u10d7 \u10d0\u10db \u10ea\u10d8\u10e4\u10e0\u10d6\u10d4, \u10e0\u10dd\u10ea\u10d0 \u10d9\u10d4\u10e0\u10eb\u10dd \u10dd\u10e0\u10d2\u10d0\u10dc\u10d8\u10d6\u10d0\u10ea\u10d8\u10d8\u10e1 \u10e8\u10d4\u10e4\u10d0\u10e1\u10d4\u10d1\u10d0 \u10d2\u10d5\u10e1\u10e3\u10e0\u10e1? \u10d3\u10d0\u10e3\u10e8\u10d5\u10d0\u10d7 \u10d2\u10d5\u10d0\u10e5\u10d5\u10e1 8%-\u10d0\u10dc\u10d8 \u10e1\u10d4\u10e1\u10ee\u10d8, \u10e8\u10d4\u10d8\u10eb\u10da\u10d4\u10d1\u10d0 \u10d5\u10d7\u10e5\u10d5\u10d7, \u10e0\u10dd\u10db 8%-\u10d8\u10d0 CoD? \u10d7\u10e3 \u10d3\u10d0\u10d5\u10e3\u10e8\u10d5\u10d4\u10d1\u10d7 \u10e0\u10dd\u10db \u10dd\u10e0\u10d2\u10d0\u10dc\u10d8\u10d6\u10d0\u10ea\u10d8\u10d0\u10db [\u2026]<\/p>","protected":false},"author":12998525,"featured_media":6880,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_wpcom_ai_launchpad_first_post":false,"_eon_insights_quality":"","_eon_insights_decision":"","_eon_insights_destination":"","_eon_insights_merge_group":"","_eon_insights_required_changes":"","_eon_insights_start_order":0,"_eon_featured_insight":0,"_eon_insights_map_version":"","_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[774675951,37372],"tags":[],"eon_topic":[],"eon_learning_path":[],"eon_collection":[],"eon_level":[],"eon_content_type":[],"eon_source":[],"eon_idea":[784445690],"eon_framework":[],"class_list":["post-1210","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate-valuation-theory-evidence-and-practice-by-m-e-zmijewski-r-w-holthausen","category-risk","eon_idea-risk"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Cost of Debt &amp; Debt \u03b2 - Eon Investment<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/eoninvestment.com\/ka\/2025\/07\/19\/cost-of-debt-debt-\u03b2\/\" \/>\n<meta property=\"og:locale\" content=\"ka_GE\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cost of Debt &amp; Debt \u03b2 - Eon Investment\" \/>\n<meta property=\"og:description\" content=\"&quot;\u10d3\u10d0\u10da\u10d8\u10e1\u10e2\u10e3\u10da\u10d8&quot; \u10d9\u10dd\u10db\u10de\u10d0\u10dc\u10d8\u10d4\u10d1\u10d8\u10e1 Cost of Debt \u10d0\u10e1\u10d4 \u10d7\u10e3 \u10d8\u10e1\u10d4 \u10ee\u10d4\u10da\u10db\u10d8\u10e1\u10d0\u10ec\u10d5\u10d3\u10dd\u10db\u10d8\u10d0, \u10db\u10d0\u10d2\u10e0\u10d0\u10db \u10e0\u10dd\u10d2\u10dd\u10e0 \u10d2\u10d0\u10d5\u10d8\u10d3\u10d4\u10d7 \u10d0\u10db \u10ea\u10d8\u10e4\u10e0\u10d6\u10d4, \u10e0\u10dd\u10ea\u10d0 \u10d9\u10d4\u10e0\u10eb\u10dd \u10dd\u10e0\u10d2\u10d0\u10dc\u10d8\u10d6\u10d0\u10ea\u10d8\u10d8\u10e1 \u10e8\u10d4\u10e4\u10d0\u10e1\u10d4\u10d1\u10d0 \u10d2\u10d5\u10e1\u10e3\u10e0\u10e1? 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