markets,itcanbeamistakewheninterestratesanddefault
spreads are volatile.
Asimplewaytoconvertbookvaluedebtintomarketvalue
debtistotreattheentiredebtonthebooksasacouponbond,
withacouponsetequaltotheinterestexpensesonallofthe
debt,andthematuritysetequalto theface-value weighted
averagematurityofthedebt,andtothenvaluethiscoupon
bondatthecurrentcostofdebtforthecompany.Thus,the
marketvalueof$1billionindebt,withinterestexpensesof
$60millionandamaturityofsixyears,whenthecurrentcost
of debt is 7.5 percent, can be estimated as follows:
Thisisanapproximation,andamoreaccuratecomputation
wouldrequirevaluingeachdebtissueseparatelyusingthis
process.Asafinalpoint,weshouldaddthepresentvalueof
operatingleasecommitmentstothismarketvalueofdebtto
arriveatanaggregatevaluefordebtincomputingthecostof
capital.
ILLUSTRATION2.7:MarketValueandBookValueDebt
Ratios: Disney
Disneyhasanumberofdebtissuesonitsbooks,withvarying
couponratesandmaturities.Thefollowingtablesummarizes
Disney’s outstanding debt in early 2004: