Premium Essay

Determinants of Cost of Debt

In: Business and Management

Submitted By ATMF
Words 8278
Pages 34
1.0 Introduction

1.1 Background of the study

Private Commercial Banks (PCBs) started their journey in Bangladesh in 1982. Since then, they play a vital role in the economic development of the country. With the help of developed banking technologies and client- focused mentality, they try to ensure quality services in quick time to their customers as per their expectation. Their prudence in selecting appropriate borrowers and sector of providing loans and monitoring them closely has decreased the percentage of non-per forming loan. Besides, the prudent regulatory measure of the central bank including guidance regarding prudential norms of capital adequacy, classification of loans, on-site and off- site super vision have made the PCBs sound in Banking operation. For these reasons, they are found profitable in their business. Their exposure in respect of the cost of debt helps them to ensure higher profitability and their potentiality in the banking industry. An effectively functioning financial system requires a banking system that can earn a reasonable return by taking an acceptable level of risks.

2.0 Statement of the problem

In order to survive in the long run, it is important for a bank to find out what are the factors influencing cost of debt so that it can take initiatives to increase its profitability and performance. Bank performance is also vitally important for all stakeholders, such as the owners, the investors, the debtors, the creditors, the depositors, the managers of banks, the regulators and the government. In this study the research question is “What are the factors that influence cost of debt of private commercial banks in Bangladesh Capital is an important and critical resource for all companies. The capital resources can be divided into two…...

Similar Documents

Premium Essay

Determinants of Capital Market

...DETERMINANTS OF CAPITAL STRUCTURE Introduction Modern theory of capital structure instigated with the seminal paper of Modigliani and Miller [1]. In brief, the MM theory states that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent from its corporate financing decisions. In fact, the MM theory provided conditions under which a firm’s financial decisions do not affect the value of the firm. The fundamental conditions under which a firm’s leverage becomes irrelevant to its market value, hence the MM proposition hold includes: * No taxation * No transaction costs exist * No default risk * Perfect and frictionless markets * Firms and investors can borrow at the same interest rate The MM theorem might seem extraneous but it provides cornerstone for corporate finance. However, the classic question “How do firms choose their capital structure?” remain unanswered. In finance, the term ‘capital structure’ refers to the technique followed by corporations to  finance its assets through combination of equity, debt, or hybrid securities [2]. In simple terms, a firm's capital structure is the symphony of its liabilities. For example, a firm that possesses $40 billion in equity and $60 billion in debt is said to be 40% equity-financed and 60% debt-financed. The firm's ratio of debt to equity that is 60% is referred to as the ‘firm's leverage’. Leverage and Gearing are two terms that are often......

Words: 1172 - Pages: 5

Premium Essay


...Debt Maxed Out was a very informational movie to me especially because I learn things about debt that will help me. My family has problems with debt and credit card using so I wish by watching this movie I may help them with those problems. Some of the things that I heard and saw on this movie, I never knew about. Maxed Out gave me an advantage over most college students who are prone and vulnerable to credit cards and debt. College Students usually are the most vulnerable to credit cards and debt. When you go to school on your first day you see many stands with credit card companies or banks who are offering to take you in to their company. They don’t do it because they want to help but because they know that they can get money from student. When you are in college you may not have a lot of money and so you get a credit card and use it because you think it won’t hurt you. Therefore they get the student with the interest which they can not pay because if they had extra money then they wouldn't have had to use the credit card. Credit card companies also have another type of people that they target and maybe more than college students which is people who have already filed for bankruptcy. They go after people who have filled for bankruptcy because once you file for it once then you can’t do it again. Of course the reason most people are bankrupt in the fist place is because of debt with credit cards or loans. So then they already no that they get addicted......

Words: 615 - Pages: 3

Premium Essay

Warranty Costs and Bad Debt Expense

...PBL 1: TechnoMaju Sdn Bhd To promote sales, the Marketing Manager offers a one-year warranty and credit sales. These warranty costs and bad debt expense are estimated at 1% of total sales and 1% of credit sales respectively. According to Mydin, since these are estimations the accountant should just ignore them. Otherwise, the amount of profit will not be accurate. Part 1 : Learning Issues 1. What are credit sales? 2. What are warranty costs? 3. What are bad debts expenses? 4. What are the methods of accounting for bad debts expenses? 5. What are the methods to estimate bad debt expenses? 6. What are the significance of the estimation of bad debt expense and warranty cost to the financial statements? Introduction A sales promotion is an activity designed to boost the sales of a product or service. It may include an advertising campaign, increased PR activity, a free-sample campaign, offering free gifts or trading stamps, arranging demonstrations or exhibitions, setting up competitions with attractive prizes, temporary price reductions, door-to-door calling, and telemarketing. Price promotions are also commonly known as “price discounting”. These offer either (1) a discount to the normal selling price of a product, or (2) more of the product at the normal price. Increased sales gained from price promotions are at the expense of a loss in profit – so these promotions must be used with care. For TechnoMaju Sdn Bhd, the company is offering a one-year......

Words: 1707 - Pages: 7

Premium Essay

Determinants of Health

...age determine an individual’s health status. A good distribution of such factors positively determines population health. Access to and quality of health services determines population health. Sufficient access and standardised quality health services exert a positive impact on population health and the reverse is the case (“Determinants of Health,” 2012). Individual behaviour determines population health. Drug and substance abuse, and poor eating habits results to poor heath condition whereas positive changes in individual behaviour positively determine health status (Truman, et al, 2011, p. 1). Biology and genetics determine population health, whereby aged individuals are prone to poor health as opposed to young population. Additionally, poor genes carried by parents are transferred to children resulting to poor health (“Determinants of Health,” 2012). America is one of the countries in which healthcare costs are ranked high. Key contributors in high healthcare costs include changes in lifestyle and demographic choices, escalating administrative costs, technological developments, and advanced pharmaceuticals. These factors have placed healthcare costs to high levels, making healthcare accessibility very expensive. As a result majority of the population is unable to access healthcare services, hindering the improvement of population health (Kluber, 2008, pp. 7-8). Lack of either private or public healthcare insurance is one of the barriers to improving population health in...

Words: 858 - Pages: 4

Premium Essay

Determinants of Quality

...λDeterminants of quality (producer’s view) There are four determinants of quality from producer’s view. These are as follows: 1. Design: By design we refer to the intention of the product. 2. Quality of conformance: After producing it that product matches with the design, and then we can call it at quality of conformance. 3. Ease of use: It means that how easily the product can be used. It is another intention of the producer. Object is that now easily consumer can use the product. Instruction must be given with the product. So, for ensuring the proper use of product instruction must be provided. 4. Service after delivery: Company should provide proper service after sell service. Company should have a HR department which will work for customer who are using their product or wish to buy their product. Customer may need information about the product that they want to buy. Or the existing consumer may need to get information because of problem about the problem. Then HR department will conduct with them. HR department plays a vital role to retain the customers. And this is also included of the quality of the product. λConsequences of quality There are four types of consequences of quality. These are as follows: 1. Loss of business: The Company which can’t satisfy the customer for a long time will lose their market share. If they lose share, they will no be bale to continue the business. So quality should be maintain/sustain to hold the......

Words: 413 - Pages: 2

Premium Essay

Debt Mangement

...sovereign debt management and monetary policy under fiscal dominance and financial instability Hans J Blommestein and Philip Turner1 Abstract Serious fiscal vulnerabilities arising from many years of high government/GDP ratios have created new and complex interactions between public debt management and monetary policy. Although their formal mandates have not changed, recent balance sheet policies of many central banks have tended to blur the separation of their policies from fiscal policy. The mandates of debt management offices have usually had a microeconomic focus (viz, minimising longer-term borrowing costs, while limiting refunding risks). Such mandates have usually avoided any explicit macroeconomic policy dimension but some major policy overlaps are latent. What is needed is a policy framework for all official actions that affect the maturity structure of government debt in the hands of the public. This requires more analysis of the macroeconomics of government debt management. A full debate about the allocation of functional responsibilities would have to take account not only of the economics, but also of political and institutional constraints. There are operational advantages in having in place appropriate governance arrangements that serve to forestall short-sighted policies and hold specific institutions accountable for their mandates. Keywords: Monetary policy, central banks, policy design and consistency, policy coordination, debt management, sovereign......

Words: 13398 - Pages: 54

Premium Essay

Determinants of a Company's Capital Structure

...risk class could possibly have higher cost of capital with higher leverage. Second, capital structure may affect the valuation of the firm, with more leveraged firms, being riskier, being valued lower than less leveraged firms. If we consider that the manager of a firm has the shareholders' wealth maximisation as his objective, then capital structure is an important decision, for it could lead to an optimal financing mix which maximises the market price per share of the firm. Capital structure has been a major issue in financial economics ever since Modigliani and Miller (henceforth referred to as MM) showed in 1958 that given frictionless markets, homogeneous expectations, etc., the capital structure decision of the firm is irrelevant. This conclusion depends entirely on the assumptions made. By relaxing the assumptions and analysing their effects, theory seeks to determine whether an optimal capital structure exists or not, and if so what could possibly be its determinants. If capital structure is not irrelevant, then there is also another thing to consider: the interaction between financing and investment. But in order to try to distinguish the effects of various determinants on capital structure, it is assumed in this paper that the investment decision is held constant. II. TRADITIONAL VIEW OF CAPITAL STRUCTURE In 1959, Durand listed the alternative approaches to valuation (Van Horne, 1990:321). Let kd represent the yield on debt, ke the yield on equity, and......

Words: 1142 - Pages: 5

Premium Essay

Debts, Credit and Inventory Costs

...Debits, Credits, and Inventory Costs Part 1: Double-Accounting Method of Recording When using the double-accounting system, also known as the double-entry method, each transaction on the General Journal and associated account activity catalog must be recorded at least into two accounts. The debit account, often on the left, is denoted by ‘Dr’ while the credit account, often on the right side, is denoted by ‘Cr’. The entries are made depending on the account type, which may be an asset, a liability, an expense account etcetera, or depending on whether the transaction increases the account or decreases it (Lee, 1977). For instance, any transaction noted on the debit side would add to the assets account. Alternatively, a transaction would be entered on the debit side if it lowers the liabilities or the equity. On the other hand, all transactions that lower the assets account would be posted on the credit side. Any transaction that adds to the liabilities or the equity would similarly be entered on the credit side of the General Journal. Debits and credits have effects on particular accounts. A debit entry can increase either an asset account or an expense account, or decrease equity account or a liability account. A credit entry, on the other hand, either increases the liability account or the equity account, or conversely decreases the asset account or the expense account. Therefore, when assets rise, they are recorded in the debit account.......

Words: 1061 - Pages: 5

Premium Essay

Costs Associated with the Issuance of Debt

...Costs associated with the issuance of debt Ryan Milliron ACC 311 Every established company will require additional capital at some point. They may choose to sell equity, obtain loans, or sell corporate bonds. When they sell bonds they incur an obligation to repay a certain amount, whether with interest or without, as well as administrative costs with the actual sale. The costs associated with either method of issuing bonds are recorded separately and amortized over the contractual life of the debt. For GAAP compliance these costs are debited to an asset account, called the debt issue costs account. IFRS on the other hand, include the costs with issuing the debt by decreasing the cash account, and decreasing the bonds payable by the costs incurred, effectively reducing the amount borrowed (IAS 39). It can be argued that IFRS in principle provides a greater level of understandability by maintaining a level of simplicity, rather than using additional asset accounts for the debt issue costs. Most companies typically do not sell their bonds to the public directly. Rather, they sell the entire issue to institutions such as investment banks who in turn sell the bonds to the public. The investment banks charge an underwriting fee to the company which may take into account the cost the investment bank pays the company for the bonds, and the re-sale proceeds the bank makes on the sale of the company’s bonds. A company may also choose to sell its debt to either a pension fund or......

Words: 734 - Pages: 3

Free Essay

College Costs and Financial Debt

...College Costs and Financial Debt Not planning for college on time can leave you with student’s loans debt in the end. I the past few years, college have skyrocket, and the once affordable college education is now a tower of debt for the new recent graduate students. Most of us in order to complete or to continue college our education, will need some federal financial aid or federal student loans to close a small gap in the end. The average public college is around $20K per year, and a private university is double that amount. The average student get his gift aid (need-based aid plus merit aid), this combined with the self-help aid (work-study plus federal loans), total his financial aid packet. These federal loans are a portion of the self-help aid that most students need to close the small financial gap in the end. A few years back the average student loan was around $17,000 (for a regular four-year education), now that amount have climbed to $27,000, this is due to the rising cost of education. Sen. Elizabeth Warren (D-Mass.), have suggested providing federal financial support to states that fund public colleges. This proposal will eliminate government profits from student loans, and punishing colleges with graduates who aren't able to manage their debt. A good example for this college debt is my story. In the spring of 1994, after three years of college, I was forced to delay my education, this was due to the high cost of college tuition. To help cover the cost of my......

Words: 851 - Pages: 4

Premium Essay

Determinants of Bank Capital Structure

...Mekelle University College of Business and Economics Department of Accounting and Finance THE DETERMINANTS OF CAPITAL STRUCTURE Evidence from Commercial Banks in Ethiopia By K i b ro m M e h a ri F i s s e h a Reg.No.-CBE/PR0025/01 Research Project Submitted to the Department of Accounting and Finance, College of Business and Economics, Mekelle University, for the partial fulfillment of the degree of Master of Finance and Investment Under the Guidance of Aregawi Gebremichael (Ph.D. Candidate) Assistant Professor May, 2010 Mekelle, Ethiopia i THE DETERMINANTS OF CAPITAL STRUCTURE Evidence from Commercial Banks in Ethiopia By Kibrom Mehari Fisseha Reg. No. CBE/PR0025/01 ii DECLARATION I, Kibrom Mehari Fisseha, hereby declare that the project work entitled “The Determinants of Capital Structure: Evidence from Commercial Banks in Ethiopia” submitted by me for the award of the degree of Master of Science in Finance and Investment of Mekelle University, is original work and it hasn’t been presented for the award of any other Degree, Diploma, Fellowship or other similar titles of any other university or institution. Place: Mekelle Signature: Date: May, 2010 ………………….. KIBROM MEHARI FISSEHA iii CERTIFICATION I certify that the project work entitled “The Determinants of Capital Structure” is a bona-fide work of Mr. Kibrom Mehari who carried out the research under my guidance. Certified further, that to the best of......

Words: 26591 - Pages: 107

Premium Essay

Determinants of Fdi

...Determinants of FDI THE POWER OF FDI IN REGARDS TO GLOBALIZATION: Globalization is an inevitable and irreversible process, and dealing with the imperatives of globalization capitalizing on its positive aspects and mitigating the negative ones is perhaps the most important challenge for today. Globalization has enhanced the opportunities for success, but it has also posed new risks to developing countries. Globalization has many faces; however, globalization is first and foremost comprehended in economic and financial terms. In this sense, it may be defined as the broadening and deepening linkages of national economies into a worldwide market for goods, services and especially capital. Perhaps the most prominent face of globalization is the rapid integration of production and financial markets over the last decade; that is, trade and investment are the prime driving forces behind globalization. Foreign direct investment (FDI) has been one of the core features of globalization and the world economy over the past two decades. It has grown at an unprecedented pace for more than a decade, with only a slight interruption during the recession of the early 1990s. More firms in more industries from more countries are expanding abroad through direct investment than ever before, and virtually all economies now compete to attract multinational enterprises (MNEs). This trend has been driven by the complex interaction of technological change, evolving corporate strategies......

Words: 4093 - Pages: 17

Premium Essay

Marriott’s Cost of Debt

...11. How do you measure Marriott’s cost of debt for each division? Why did you choose these numbers? Basically, cost of debt equals rB(1-T)(BV) is the formula we used when measure the cost of debt. For Marriott’s three divisions, we need to assume each division is an independent company rather than view them as a whole. Each division has differences in risk, which varies required rate of return (rB) among three divisions. Each division’s debt percentage in capital is provided in text, then how to determine rB for divisions is a key issue. Regarding lodging, we need to use the cost of long-term debt because lodging assets commonly have a pretty long life time, and bondholders would not invest in lodging if the debt rate is similar as the shorter-term debt. On the basis of U.S. Government interest rates in 1988, 30-year bonds rate is 8.95%, the spread between the debt and government bond rate is 1.10%, thus rB of lodging is 10.05% (8.95%+1.10%). Shorter-term debt shall be applied as the cost of debt for both contract services and restaurant divisions since their assets have shorter useful lives. 1-year bonds of U.S. government interest rate are 6.90%, debt rates premium above government rate for contract services and restaurant divisions is 1.40% and 1.80%. Therefore, required rate of return for contract services is 8.30% while for restaurants is 8.70%. 12. How did you measure the beta of each division?...

Words: 263 - Pages: 2

Free Essay


...Debt Ceiling Crisis This essay is intended to provide a breakdown of the debate concerning the debt ceiling. As the house debates, the debts increases and the issue continues to become complicated. The nation is in a crisis along with complex issues. President Obama along with the rest of the house is at odds deciding if the debt ceiling should be raised. The debate on Capitol Hill has been going on for few months now, as the August 2, deadline nears. The democratic and Republican Party both agree it is imperative that the ceiling needs to be raised but the issues surrounding the debt separates congress. The current debt ceiling stands at 14 trillion dollars and continues to grow. This debate has divided the nation’s citizens as well. It is not just a situation of more money to spend, if the ceiling is not raised the money would have to come from social security and Medicare. The Democratic Party supports raising the debt ceiling. The democrats know that if the ceiling is not passed there would be a dramatic downward spiral in the nation’s economy. This act would cut social security and Medicare. The democrats acknowledge the monies borrowed must be repaid but not at the expense of taking away from the elderly. “Understand - raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has......

Words: 669 - Pages: 3

Free Essay

Ireland Debt

...UCD CENTRE FOR ECONOMIC RESEARCH WORKING PAPER SERIES 2011 Ireland’s Sovereign Debt Crisis Karl Whelan, University College Dublin WP11/09 May 2011 UCD SCHOOL OF ECONOMICS UNIVERSITY COLLEGE DUBLIN BELFIELD DUBLIN 4 Ireland’s Sovereign Debt Crisis Karl Whelan University College Dublin 1 May 2011 1 This paper was presented at a workshop on "Life in the Eurozone With or Without Sovereign Default?" that took place at the European University Institute in Florence on April 14, 2011. 1 1. Introduction Among the countries currently experiencing sovereign debt crises, Ireland’s case is perhaps the most dramatic. As recently as 2007, Ireland was seen by many as top of the European class in its economic achievements. Ireland had combined a long period of high economic growth and low unemployment with budget surpluses. The country appeared to be well placed to cope with any economic slowdown as it had a gross debtGDP ratio in 2007 of 25% and a sovereign wealth fund worth about €5000 a head. Fast forward four years and Ireland is shut out of sovereign debt markets and in an EUIMF adjustment programme. Its debt-GDP ratio has soared over 100% and the sovereign wealth fund is effectively gone. In this short paper, I provide a brief review of how this rapid change came about and discuss potential future developments in relation to Ireland’s sovereign debt situation. 2. The Rise and Fall of the Celtic Tiger It is now well known that Ireland’s famed “Celtic Tiger”......

Words: 5442 - Pages: 22