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Although we can use forward-rate contracts to estimate equivalent domestic rates for relatively short-term debt (less than 18 months), no easily referenced forward markets exist farther out. For longer-term borrowing, we recommend that you assume the domestic equivalent rate is roughly equal to the actual domestic rate.


Leases, both capital and operating, are substitutes for other types of debt. It is reasonable in most cases to assume that their opportunity cost is the same as for the company's other long-term debt.

Straight Preferred Stock

The cost of preferred stock that is perpetual, noncallable, and nonconvertible can be calculated as follows:

The cost of preferred stock

The promised dividend on the preferred stock The market price of the preferred stock where kp =

If the current market price is not available, use yields on similar-quality issues as an estimate. For a fixed-life or callable preferred stock issue, estimate the opportunity cost by using the same approach as for a comparable debt instrument. In other words, estimate the yield that equates the expected stream of payments with the market value. For convertible preferred issues, option-pricing approaches are necessary.

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