What is the cost of debt for ATVI?

What is the Cost of Debt for ATVI?

What is the Cost of Debt?

The cost of debt refers to the rate at which a company’s shareholders must be paid in order to maintain their required return. This is typically calculated using the weighted average cost of capital (WACC), which includes the cost of equity, cost of debt, and tax rates.

Calculating the Cost of Debt

The cost of debt can be calculated by adding the weighted average interest rates on the company’s outstanding debt, weighted by the relative amount of debt with each interest rate.

Cost of Debt Example

Suppose Activision Blizzard Inc. (ATVI) has outstanding debt with the following terms:

• 5% interest rate on a $500 million loan with 10-year maturity
• 4% interest rate on a $400 million loan with 7-year maturity
• 3% interest rate on a $600 million loan with 15-year maturity

Using the following calculation:

Interest on 5% loan: $500,000,000 x 5% = $25,000,000 per annum
Interest on 4% loan: $400,000,000 x 4% = $16,000,000 per annum
Interest on 3% loan: $600,000,000 x 3% = $18,000,000 per annum
Total interest expense: $25,000,000 + $16,000,000 + $18,000,000 = $59,000,000 per annum

To find the weighted average interest rate, the debt balances are divided by the total debt outstanding and the corresponding interest rates are added together.

• 5% interest rate: 0.5/1.5 = 33.33% of the total debt outstanding
• 4% interest rate: 0.4/1.5 = 26.67% of the total debt outstanding
• 3% interest rate: 0.6/1.5 = 40% of the total debt outstanding
  Weighted average interest rate: 33.33% x 5% + 26.67% x 4% + 40% x 3% = 3.82%

What is the Cost of Debt for ATVI?

According to Activision Blizzard’s financial reports as of June 2023, the company has outstanding debt of $3610.6 million with the following terms:

• 8.21% interest rate on a $3000 million loan with 10-year maturity
• 6.13% interest rate on a $300 million loan with 5-year maturity
• 5.33% interest rate on a $310 million loan with 15-year maturity

Using the same calculation:

Interest on 8.21% loan: $3000,000,000 x 8.21% = $246,300,000 per annum
Interest on 6.13% loan: $300,000,000 x 6.13% = $18,390,000 per annum
Interest on 5.33% loan: $310,000,000 x 5.33% = $16,547,000 per annum
Total interest expense: $246,300,000 + $18,390,000 + $16,547,000 = $281,237,000 per annum

Weighted average interest rate: Using the same method as before, the debt balances are divided by the total debt outstanding and the corresponding interest rates are added together.

• 8.21% interest rate: 0.83/2.91 = 28.53% of the total debt outstanding
• 6.13% interest rate: 0.1/2.91 = 3.45% of the total debt outstanding
• 5.33% interest rate: 0.09/2.91 = 3.08% of the total debt outstanding
  Weighted average interest rate: 28.53% x 8.21% + 3.45% x 6.13% + 3.08% x 5.33% = 5.27%

Therefore, the cost of debt for ATVI is approximately 5.27%.